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					     MULTIPLE PARTY FINANCING TRANSACTIONS — SELECTED TOPICS
                          ALAN S. DUBIN
                         ARENT FOX PLLC
                         OCTOBER 24, 2006

                                               TABLE OF CONTENTS


Suretyship law Issues arising in connection with Multiple
Borrowers and Guaranties ...........................................................................................................1

Fraudulent Transfer Issues arising in connection with
Multiple Borrowers, Guaranties, and Leveraged Buyouts ....................................................2

Substantive Consolidation Issues...............................................................................................5

Subordination Agreements..........................................................................................................6

Real Estate Mezzanine Loans and Intercreditor Agreements
(Not Really Subordination Agreements) ...................................................................................9
                             SURETYSHIP LAW ISSUES
                      ARISING IN CONNECTION WITH
                  MULTIPLE BORROWERS AND GUARANTIES

SENSIBLE WAIVERS OF SURETYSHIP DEFENSES

OVERLY AGGRESSIVE WAIVERS OF APPROPRIATE DEFENSES

BANKRUPTCY PREFERENCE PROBLEMS

SOME C ONTRACTUAL APPROACHES

      Broad Waivers of Suretyship Defenses

      Overly Broad Waivers of Suretyship Defenses

      Preservation of Guarantor’s Right to Assert Borrower’s Defenses

      “Deprezio” Waivers and Their Necessity




Structuring Business Transactions                                       Page 1
                         FRAUDULENT TRANSFER ISSUES
                  ARISING IN CONNECTION WITH
    MULTIPLE BORROWERS, GUARANTIES, AND LEVERAGED BUYOUTS

TYPICAL FACT PATTERNS

       Upstream Guaranties



                       Bank                                  Bank


                        Loan                                     Loan




     Guaranty          Borrow er         Guaranty          Shareholder




   Subsidiary                          Corporation




       Cross-Stream Guaranties


                                      Bank




                        Guaranty    Shareholder       Loan




                       Af filated                    Borrow er
                      Corporation




Structuring Business Transactions                                        Page 2
      Multiple Borrowers — Jointly and Severally Liable for Loan



                                               Bank


                              $10,000
                               Loan
                                            $100,000
                                              Loan                        Guaranty
                Guaranty                                                  of Whole
                of Whole            Guaranty                 $500,000       Loan
                  Loan              of Whole                   Loan
                                      Loan



               Borrow er                    Borrow er                      Borrow er




      Leveraged Buyouts

       There are far too many variations on the leveraged buy-out theme to supply a
comprehensive set of diagrams. Suffice it to say that the target of the buy-out
mortgages its assets, and the proceeds of the loans are all used to pay the selling
stockholders. The target is thus weakened financially. The selling stockholders, rather
than the target‘s existing creditors, are benefited by the new loan.

      Loans to Fund Redemptions of Stock


                                                              Bank



                              Shareholder
                                                               Loan

                                               Stock   $$$




                                                              Borrow er


SOURCES OF THE PROBLEMS

      Uniform Fraudulent Conveyances Act

Structuring Business Transactions                                                      Page 3
      Uniform Fraudulent Transfers Act

      Section 548 of the Bankruptcy Code (Distinguish: Preferences under the
      Bankruptcy Code)

ANALYSIS UNDER UNIFORM ACTS AND SECTION 548

      Definitions

             Insolvency

             Transfer

             Reasonably Equivalent Value

      Elements of Fraudulent Conveyance

             Transfer by Transferor

             Transferor is or becomes insolvent as a result of the transfer

             Transferor has unreasonably small capital with which to engage in its anticipated
             business

             Transfer intends to incur debts that will be beyond its ability to pay as such debts
             mature

SOME C ONTRACTUAL APPROACHES TO MINIMIZING THE PROBLEM

      Cross-Contribution and Indemnification Agreements

      Waivers of Subrogation and Reimbursement Rights

      Savings Clauses Limiting Effect of Guaranties




Structuring Business Transactions                                                           Page 4
                     SUBSTANTIVE CONSOLIDATION ISSUES

USUAL C ONTEXT

      Securitized Commercial Mortgage Transactions

      Liquid Asset Securitization Transactions

SOME C ONTRACTUAL APPROACHES TO MINIMIZING THE PROBLEM

      Separateness Covenants

             Organizational Documents

             Loan Documents

      Unintended Consequences of Some Separateness Covenants

             Payment of Payables by Specified Deadline

             Maintenance of Adequate Capital

             Maintenance of Solvency

             Employment oif Adequate Number of Employees




Structuring Business Transactions                              Page 5
                            SUBORDINATION AGREEMENTS

BASIC FACT SITUATION


               Seller

                                          Subordina tion
                                           Agre emen t
                         Assets                                Bank
                                    $$$
                     Note
        Security                                 $$$
       Agre emen t
                                          Note
             Purchaser


DEBT SUBORDINATION VS. LIEN SUBORDINATION

      Lien subordination relates only to priorities of liens

      Debt subordination prohibits or defers payments on Subordinated Debt




Structuring Business Transactions                                            Page 6
      The “double dividend” phenomenon

                                                      Assuming              Assuming Pfd.
                                                    Subordination               Stock


       Assets                                              $600,000                $600,000
       Liabilitie s
                               Senior Debt                   $500,000                $500,000
                               Subord. Debt                  $500,000                         $0
                               Other Debt                    $500,000                $500,000
                                                   -------------           -------------
       Assets-Liabilities                                  ($900,000)              ($400,000)
       Pref erred Stock                                               $0           ($500,000)

       Ratio of A ssets to Liabilities                             40%                     60%

       Distributio ns w ithout subordin atio n:

       Senior Creditor                                     $200,000                $300,000
       Subord. Creditor                                    $200,000                        $0
       Other creditors                                     $200,000                $300,000
       Pref erred Stock                                            $0                      $0


       Distributio ns w ith subordination:

       Senior Creditor
                               Senior Claim                  $200,000                $300,000
                               Subord Claim                  $200,000                        $0
                                                   -------------           -------------
       Total Senior Creditor                                 $400,000                $300,000

       Subord. Creditor                                            $0                      $0
       Other creditors                                     $200,000                $300,000
       Pref erred stock                                            $0                      $0

DEGREES OF SUBORDINATION

      Total Subordination

                 No payments on Subordinated Debt until full repayment of Senior Debt

                 Used often in cases where Subordinated Debt not due in installments

      Inchoate or Default Subordination

                 Scheduled payments on Subordinated Debt permitted

Structuring Business Transactions                                                                  Page 7
             Payments not permitted if any default, or inchoate default, on Senior Debt

      Bankruptcy Subordination

             Scheduled payments on Subordinated Debt permitted

             Payments not permitted if bankruptcy or reorganization of common debtor

SOME FEATURES OF SUBORDINATION AGREEMENTS

      Distributions in Reorganization

      Post—Petition Interest

      “Standstill” on legal action by Subordinated Creditor

      Remedies Available to Subordinated Creditor

      Right of Senior Lender to amend senior loan documents

      Right of Subordinated Creditor to amend subordinated loan documents

      Limitations on transfer of Subordinated Debt




Structuring Business Transactions                                                         Page 8
                        REAL ESTATE MEZZANINE LOANS
                                 AND
                      INTERCREDITOR AGREEMENTS
                (NOT REALLY SUBORDINATION AGREEMENTS)

BASIC FACT PATTERN

                                        Mezzanine
    Mezzanine                    $$     Lender
    Borrower                     $
                                Note

       Equity                              Intercreditor
                     Pledge
                                           Agreement


                                 $$     Mortgage
  Mortgage                       $      Lender
                              Note
  Borrower


     Equity          Mortgage


      Blackacre

DOES “SUBORDINATION” MAKE SENSE HERE?

      Structural Subordination

SOME FEATURES OF INTERCREDITOR AGREEMENTS

      “Standstill” on legal action by Mezzanine Lender

      Remedies Available to Mezzanine Lender

      Right of Mortgage Lender to amend Mortgage Loan Documents

      Right of Mezzanine Lender to amend Mezzanine Loan Documents

      Limitations on transfer of Mezzanine Loan

SOME SOURCES OF MISCHIEF


Structuring Business Transactions                                   Page 9
      Inter-Related Cash Management Provisions

      Mezzanine Lender Takes Control after “Incurable Default”

      Foreclosure On Mezzanine Collateral and Securities Laws Concerns




Structuring Business Transactions                                        Page 10
Structuring Business Transactions   Page 11
                    1.     GUARANTOR AS LENDER’S DEPUTY

      Facts:

           a.     Borrower is a non-profit institution borrowing $10 MM to build a
new headquarters building.

               b.    Wealthy benefactor will guaranty $10 MM but not a penny more.

            c.     No amortization on loan for first 5 years. Interest at 6% fixed
payable every six months. By end of each 6-month interval balance is $10.3 MM.

           d.      Standard form of guaranty says Guarantor has no right of
reimbursement or subrogation until loan is repaid in full.

      Problem:

               Guarantor objects to this provision and won‘t budge.

      Solution:

             a.    Permit Guarantor to have right of reimbursement and subrogation
under limited circumstances.

           b.    Guarantor must pay the $10 MM in full in cash within 5 days of
demand. Payment must be accompanied by letter stating that Guarantor has no
defenses.

             c.     Guarantor then has exclusive right to pursue Borrower for six
months. All recoveries, net of costs of collection, must be remitted to Lender until
Lender‘s claim has been paid in full.

              d.     When Lender‘s claim has been paid in full, Lender assigns all of its
rights to Guarantor to continue pursuing Borrower.

               e.    At end of 6 months if Lender‘s claim not paid in full, Guarantor
loses right to continue to pursue Borrower and parties return to normal no
reimbursement/no subrogation regime.

               f.     Guarantor can buy Lender‘s claims against Borrower at any time
after default at par.




Structuring Business Transactions                                                    Page 12
      2.       Securitized Real Estate Loan and Non-Recourse Carve-Out Guaranties

      Facts:

               a.    SPE borrows loan secured by Blackacre.

               b.     Loan is non-recourse except for ―standard bad-boy‖ carve-outs,
including any voluntary bankruptcy filing by SPE, collusive involuntary bankruptcy
filing against SPE, fraud and misappropriation.

               c.    Non-SPE owner is required to guaranty SPE‘s liability under the
carve-outs.

      Problem:

             a.    A guaranty of payment by the parent of SPE is considered a
problem for non-consolidation opinion pairing the SPE with its parent.

              b.    Although the carve-outs are allegedly ―standard bad-boy‖ only, in
reality non-obvious credit support (like a guaranty?) is provided by certain carve-outs
covering, for example:

                   •        Interest during lease-up period, in unknown amount, but
limited cumulatively to (i) 10% of the loan amount, or (ii) 20% of the loan amount.

                     •      Any involuntary bankruptcy against SPE.

                   •       Any ―transfers‖ without the lender‘s consent. ―Transfer‖
includes any involuntary lien, which may include a judgment lien in favor of a trade
creditor.

                     •      Acquiescence in non-collusive involuntary bankruptcy filing
against SPE.

                     •      Failure to pay real estate taxes.

                     •      Failure to pay property insurance.

                    •       Failure to comply with SPE covenants – but those covenants
include obligations to (i) maintain adequate capital, (ii) remain solvent, (iii) pay all
payables before they are older than X days, and (iv) ensure that payables don‘t exceed
X% of the loan amount.




Structuring Business Transactions                                                Page 13
      Solutions:

             a.     Consider using letter of credit instead of parent guaranty.

              b.     Limit the effect of the ―non-obvious credit support carve-outs‖ to
actual loss suffered by the lender, but not a springing full recourse guaranty.

              c.     Exclude parent liability for non-collusive involuntary bankruptcy
filings unless the SPE acquiesces when the SPE actually has a legitimate defense to the
petition.

            d.     Exclude parent liability for failures to pay to situations in which
the money was available but the SPE failed to pay anyway – akin to liability arising
from misappropriation of funds.

               e.     Limit parent liability for failures to maintain solvency or adequate
capital to situations in which the SPE makes distributions to the parent instead of using
the money to pay its obligations – akin to liability arising from misappropriation of
funds. An alternative formulation: limit parent liability for failures to maintain
solvency or adequate capital to situations in which the SPE makes distributions to the
parent in violation of applicable corporate, partnership or limited liability company
statutes.




Structuring Business Transactions                                                 Page 14
       3.       Affiliate Contribution Agreements versus Guaranty Savings Provisions

       Facts:

                a.    Lender makes loan to Parent.

             b.      Business deal is that all five of Parent‘s subsidiaries must be jointly
and severally liable for repayment of the loan. Deal is therefore structured as loan to
parent with guaranties by all subsidiaries.

             c.      There is no way to know which, if any, of the subsidiaries will ever
receive any of the loan proceeds.

              d.     The loan amount is greater than any subsidiary‘s net worth at the
time of the loan closing.

       Problem:

               a.     When the loan is in default, the lender will enforce the guaranty
against a subsidiary. Assume that the subsidiary received none of the loan proceeds
and that, if the subsidiary pays, it will have inadequate resources to pay its ―own‖
creditors.

               b.    Therefore, repayment of the loan by the subsidiary may be a
fraudulent transfer under Bankruptcy Code §548 and applicable state fraudulent
transfer laws.

       Possible Solutions and Weaknesses

       Solution #1:

                a.    Structure deal as loan to six co-borrowers.

               b.     The problem with this solution is that, if a subsidiary does not
receive loan proceeds, it should still be considered to be acting as a surety. There is so
little doubt that such a subsidiary is acting as a surety that it is almost universally true
that careful lawyers include suretyship waivers in the loan agreement to prevent a
court from excusing the subsidiary from its obligations under one or more of the
suretyship defenses. The ―solution‖ may therefore achieve nothing.

       Solution #2:

              a.      Guaranty provides that it will be enforceable only to the extent that
it does not result in a fraudulent transfer.


Structuring Business Transactions                                                      Page 15
               b.     The problem with this solution is that it concedes the argument in
advance. The lender would prefer that its claim be treated the same as all other
creditors‘ claims, so that each would share proportionately in the shortfall between
what the subsidiary can pay and what it owes.

       Solution #3:

             a.     Parent and all subsidiaries enter into affiliate contribution
agreement to allocate responsibility for repayment of the loan in proportion to benefits
received by each party.

                b.     As beneficiary of the contribution obligations of all other obligors,
each guarantor should consider itself to have a contingent asset equal to the contingent
liability it acquires as a result of the guaranty.

             c.    Therefore, the guaranty is incurred in exchange for reasonably
equivalent value and the incurrence of the guaranty does not render the guarantor
insolvent.

              d.      There are several problems.

                     •      If the borrower and all of the subsidiaries are solvent when
the loan is made, this system would always prevent a fraudulent transfer attack on
subsequent payment of the loan by the subsidiaries, who upon payment become
unable to pay their ―own‖ creditors. This is essentially an atmospheric problem, not an
analytical one. But we are trying to be practical.

                     •     This system would only work if the fraudulent transfer
analysis is made when the guaranty is incurred but not when it is paid. However, if the
guaranty is secured by collateral of the guarantor, the only appropriate time to measure
the transfer should be when the security interest is perfected.

                     •      Each guarantor has a common law rights of reimbursement
and indemnity anyway, so some might doubt whether the affiliate contribution
agreement actually accomplishes anything. On the other hand, it can clarify what might
otherwise be very unclear. And it is possible that the group of obligors can allocate
responsibility for eventual repayment based on their own conception of the benefit
derived by each from the extension of the loan rather than in proportion to the loan
proceeds received by each.




Structuring Business Transactions                                                    Page 16
      4.       Foreclosure on Mezzanine Collateral

      Facts:

               a.    Mortgage lender makes mortgage loan on Blackacre.

               b.    Blackacre is owned by SPE-Owner, an LLC.

               c.    SPE-Owner is owned by SPE-Mezz, an LLC.

           d.     Mezzanine lender makes loan to SPE-Mezz secured only by its
membership interest in SPE-Owner.

             e.    On default under the mezzanine loan, mezzanine lender wishes to
foreclose and become the owner of the membership interest in SPE-Owner.

      Problem:

               a.     Under UCC §9-610(c), mezzanine lender can‘t buy this type of
collateral at foreclosure unless the foreclosure sale is a public sale.

               b.     Membership interest in SPE-Owner is probably a ―security‖ under
the Securities Act of 1933 and perhaps under applicable state securities laws (let‘s
assume it is).

              c.   Under the securities laws, mezzanine lender can‘t conduct a public
sale of the membership interest without registration or an exemption from registration.

           d.     Under UCC §9-620, mezzanine lender proposes to retain pledged
membership interest in full satisfaction of the mezzanine loan but SPE-Mezz does not
agree.

              e.      Mezzanine lender complies with the SEC‘s no-action letters and
limits nature of the advertising, allows purchases only by sophisticated and financially
strong purchasers, limits number of offerees and purchasers, insists on ―no intent to
distribute‖ representations from purchaser or purchasers, etc.

               f.    Mezzanine lender is the successful buyer at the foreclosure sale.

               g.    While compliance with the no-action letters would ensure no
violation of the securities laws, the no-action letters do not bind a court considering a
claim by SPE-Mezz (including a bankruptcy court considering a claim by its trustee or
creditors‘ committee) that mezzanine lender purchased at a private sale in violation of
UCC §9-610.


Structuring Business Transactions                                                  Page 17
       Solution:

              a.      UCC §9-603 allows the debtor and secured party to agree, if their
agreement is not manifestly unreasonable, on standards for measuring the fulfillment
of the debtor‘s rights and the secured party‘s responsibilities under the various
remedial provisions in Part 6 of Article 9 that are mentioned in UCC §9-602.

            b.      Pledge agreement therefore provides that, if the mezzanine lender
complies with the SEC‘s no-action letters, SPE-Mezz agrees that the foreclosure sale,
though not public for ‘33 Act purposes, is public for UCC purposes.

               c.    UCC §9-610 Official Comment 8 clearly contemplates that a
disposition that qualifies as a private placement (which is the thrust of the no-action
letters) can nevertheless be public for §9-610 purposes.

               d.     Note: this is not a perfect solution because §9-602 refers to §9-610(b)
but not (c), and it could be argued that the rule in (c) – that the secured party can‘t buy
this type of collateral at private sale – is not an appropriate matter for an agreement
under §9-603. On the other hand, §9-603 Official Comment 1 states: ―Subsection (a), like
former Section 9-503(3), permits the parties to set standards for compliance with the
rights and duties under this Part if the standards are not ‗manifestly unreasonable.‘‖




Structuring Business Transactions                                                    Page 18
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Structuring Business Transactions                                                      Page 19
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Structuring Business Transactions                                                    Page 20

				
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