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FORECLOSURE OF EQUITY INTERESTS

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.

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FORECLOSURE OF EQUITY INTERESTS

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  1. FORECLOSURE OF EQUITY INTERESTS ComFin Fall Meeting (November 7, 2007) John R. Clemency clemencyj@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. John Clemency

  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 John Clemency

  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. John Clemency

  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. John Clemency

  7. 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. John Clemency

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

  9. 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. John Clemency

  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. John Clemency

  11. 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. John Clemency

  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] John Clemency

  13. 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 John Clemency

  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. John Clemency

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