Presenting a live 90-minute webinar with interactive Q&A Equity Interests as Collateral: Creating and Enforcing Security Interests in Stocks, Partnerships and LLCs Navigating Unique Planning and Documentation Issues, Avoiding Potential Pitfalls in Perfecting Security Interests

THURSDAY, MARCH 9, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Today’s faculty features:

​ James S. Cochran, Partner, O'Connor Cochran, Los Angeles

James D. Prendergast, SVP, Legal Counsel-UCC Division, First American Title Insurance Company, Santa Ana, Calif.

Steven O. Weise, Partner, Proskauer Rose, Los Angeles

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EAGLE 9® UCC Division FIRST AMERICAN TITLE INSURANCE COMPANY EAGLE 9® UCC Division

Pacific Ocean

Pepperdine Law School

6 EAGLE 9® UCC Division Our Mission

Cover foreclosure of Article 9 security interests on equity collateral.

7 EAGLE 9® UCC Division

FORECLOSURE

8 ® EAGLE 9 UCC Division A GUIDE TO THINKING ABOUT PERFECTION

 Step 1: Does Article 9 Apply?  Step 2: Attachment  Step 3: Categorize the Collateral  Step 4: Perfection Step  Filing (§9-310)  Perfection under non-Article 9 law (§9-311(a))  Possession (§9-313)  Control (§§9-314, 9-104, 9-106, 8-106)  Step 5: Priority Consequences

9 EAGLE 9® UCC Division US CMBS and CRE CDO: Moody’s Approach to Rating Commercial Real Estate Mezzanine Loans

 Pledge of 100% of the equity  Opt In to Article 8  Certificate the Equity  File a Financing Statement  Control the ability to Opt Out – hardwire or proxy  UCC Insurance

10 EAGLE 9® UCC Division

NEED TO CONSIDER NOT ONLY  SECURED CREDITOR STATUS UNDER ARTICLE 9 OF THE UCC; BUT ALSO  PROTECTED PURCHASER STATUS UNDER ARTICLE 8 OF THE UCC

11 EAGLE 9® UCC Division

FORECLOSURE

12 EAGLE 9® UCC Division Methods of Foreclosure

• Foreclosure by Public Sale • Foreclosure by Private Sale • Retention of Collateral in Satisfaction of the Debt • Judicial Enforcement • Collection Rights under UCC Section 9-607

13 EAGLE 9® UCC Division Foreclosure 101:

1. Analogies to real property law don’t work – as is generally true:  foreclosure cuts off right of redemption (§9-623(c))  rights of good faith transferee (§9-617(b)) 2. Secured creditor rights upon default (including foreclosure) are covered in Part 6 of Article 9.

14 EAGLE 9® UCC Division Sale Procedures Compared

Judicial sale Article 9 sale Purpose

By whom? Legal standard?

When final? Judgment for deficiency?

15 EAGLE 9® UCC Division Sale Procedures Compared

Judicial sale Article 9 sale Purpose Enforce mortgage Protect “equity” Maybe fix deficiency By whom? Legal standard?

When final? Judgment for deficiency?

16 EAGLE 9® UCC Division Sale Procedures Compared

Judicial sale Article 9 sale Purpose Enforce mortgage Enforce SI Protect “equity” Protect “surplus” Maybe fix deficiency Maybe fix deficiency By whom? Legal standard?

When final? Judgment for deficiency?

17 EAGLE 9® UCC Division Sale Procedures Compared

Judicial sale Article 9 sale Purpose Enforce mortgage Enforce SI Protect “equity” Protect “surplus” Maybe fix deficiency Maybe fix deficiency By whom? Sheriff, clerk Legal standard?

When final? Judgment for deficiency?

18 EAGLE 9® UCC Division Sale Procedures Compared

Judicial sale Article 9 sale Purpose Enforce mortgage Enforce SI Protect “equity” Protect “surplus” Maybe fix deficiency Maybe fix deficiency By whom? Sheriff, clerk Secured party Legal standard?

When final? Judgment for deficiency?

19 EAGLE 9® UCC Division Sale Procedures Compared

Judicial sale Article 9 sale Purpose Enforce mortgage Enforce SI Protect “equity” Protect “surplus” Maybe fix deficiency Maybe fix deficiency By whom? Sheriff, clerk Secured party Legal standard? Fixed procedural requirements When final? Judgment for deficiency?

20 EAGLE 9® UCC Division Sale Procedures Compared

Judicial sale Article 9 sale Purpose Enforce mortgage Enforce SI Protect “equity” Protect “surplus” Maybe fix deficiency Maybe fix deficiency By whom? Sheriff, clerk Secured party Legal standard? Fixed procedural Commercially requirements reasonable When final? Judgment for deficiency?

21 Sale Procedures EAGLE 9® UCC Division Compared

Judicial sale Article 9 sale Purpose Enforce mortgage Enforce SI Protect “equity” Protect “surplus” Maybe fix deficiency Maybe fix deficiency By whom? Sheriff, clerk Secured party Legal standard? Fixed procedural Commercially requirements reasonable When final? On confirmation Judgment for deficiency?

22 EAGLE 9® UCC Division Sale Procedures Compared

Judicial sale Article 9 sale Purpose Enforce mortgage Enforce SI Protect “equity” Protect “surplus” Maybe fix deficiency Maybe fix deficiency By whom? Sheriff, clerk Secured party Legal standard? Fixed procedural Commercially requirements reasonable When final? On confirmation Upon sale Judgment for deficiency?

23 EAGLE 9® UCC Division Sale Procedures Compared

Judicial sale Article 9 sale Purpose Enforce mortgage Enforce SI Protect “equity” Protect “surplus” Maybe fix deficiency Maybe fix deficiency By whom? Sheriff, clerk Secured party Legal standard? Fixed procedural Commercially requirements reasonable When final? On confirmation Upon sale Judgment for Varied rules deficiency?

24 Sale Procedures EAGLE 9® UCC Division Compared Judicial sale Article 9 sale

Purpose Enforce mortgage Enforce SI Protect “equity” Protect “surplus” Maybe fix deficiency Maybe fix deficiency By whom? Sheriff, clerk Secured party Legal standard? Fixed procedural Commercially requirements reasonable When final? On confirmation Upon sale Judgment for Varied rules If procedure OK; and deficiency? special rule if secured is buyer*

25 *§9-615(f) EAGLE 9® UCC Division Sale Procedures Compared Judicial sale Article 9 sale Purpose Enforce mortgage Enforce SI Protect “equity” Protect “surplus” Maybe fix deficiency Maybe fix deficiency By whom? Sheriff, clerk Secured party Legal standard? Fixed procedural Commercially requirements reasonable When final? On confirmation Upon sale Judgment for Varied rules If procedure OK; and deficiency? special rule if secured is buyer*

26 *§9-615(f) Public vs. Private UCC EAGLE 9® UCC Division Foreclosure Sales

Public Sale – • Not defined • Meaningful opportunity for competitive bidding • Some form of advertising and notice to maximize public participation • Commercially Reasonable

27 EAGLE 9® UCC Division 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.

28 EAGLE 9® UCC Division Public/Private Sale:

Notice:  Notification provisions of §§9-611-613.  Who receives notice of the sale. (§9-611)  The Debtor, any secondary obligor, other secured creditors, and others requesting notice.  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.

29

EAGLE 9® UCC Division Public/Private Sale:

Notice:  Contents of notice of sale: “time and place of a public disposition” vs. “time after which” (§9-613).  Timeliness of notice:10 day safe harbor (§9-612).  UCC Foreclosure Notice Insurance Policy™.

30 EAGLE 9® UCC Division Content of Notice

§9-613 provides that notice is sufficient if it:  Describes the debtor and the secured party  Describes the collateral being sold  States the method of intended disposition  States that the debtor is entitled to an accounting of the unpaid indebtedness and states the charge, if any, for the accounting  States the time and place of public disposition or the time after which any other disposition will be made

31 EAGLE 9® UCC Division Where to Advertise

 Depends on the type of collateral  Newspapers of general circulation  Trade journals  Location of likely bidders  Specialized markets

32 EAGLE 9® UCC Division Public/Private Sale:

 Private Sale Significantly Cheaper  Commercially Reasonable Notice AND Commercially Reasonable Sale  “Qualified Transferee”  Rights of Good Faith Transferee (§9- 617)

33 EAGLE 9® UCC Division Commercially Reasonable Sale

§9-610(b): Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable

34 EAGLE 9® UCC Division Commercially Reasonable Sale

§9-627(b)(3): Otherwise in conformity with reasonable commercially practices among dealers in the type of property that was the subject of the disposition.

35 EAGLE 9® UCC Division Commercially Reasonable Sale

§9-627(a): The fact that a greater price could have been obtained ...is not itself sufficient to preclude the secured party from establishing that the ...[foreclosure] was made in a commercially reasonable manner

36 EAGLE 9® UCC Division

Commercial Reasonableness is like pornography, hard to define, but you know it when you see it.*

*paraphrasing Potter Stewart in Jacobellis v. Ohio (1964).

37 EAGLE 9® UCC Division Case Authority on what constitutes Commercial Reasonableness Vornado PS, L.L.C. v. Primestone Inv. Partners, L.P., 821 A.2d 296, 49 UCC Rep.Serv.2d 1348 (2002).  The foreclosing creditor should seriously conduct the sale as if it really wanted to obtain the highest price for the collateral, including the hiring of respected and knowledgeable investment bankers, real estate brokers and the like.  Inside information need not always be disclosed if there is sufficient reason for confidentiality or the failure to disclose.  An external market will be dispositive of reasonable price but the highest price is not required for reasonableness.  A public sale is warranted notwithstanding Official Comments especially if the foreclosing creditor is a likely sole bidder for the collateral, which is often the case in the foreclosure of real estate mezzanine loan collateral.  The noticed rules for the conduct of the sale can be followed.

38 Case Authority on what EAGLE 9® UCC Division constitutes Commercial Reasonableness Voutiritsas v. Intercounty Title Co. of Illinois, 279 Ill.App.3d 170, 664 N.E.2d 170, 215 Ill.Dec. 773, 31 UCC Rep.Serv.2d 950 (1996).  If you are foreclosing on equity collateral pledged to secure a mezzanine real property loan, it is very prudent to describe the underlying realty that is involved because no one bidding at the foreclosure dale wants to acquire the membership certificate just to frame it. Notwithstanding what is being foreclosed, what actually is being sold?  Again, as in Vornado, the foreclosing creditor should seriously conduct the sale as if it really wanted to obtain the highest price for the collateral.  If the secured party is the only bidder at the foreclosure sale, it will have a significant burden showing that the sale was conducted in a commercially reasonable manner. Keep notes to answer the question as to why the secured party was the only bidder, e.g., the property was so far under water that the pledged equity in the owner of the real property had no value and the secured party held the sale for other legitimate reasons, such as to set a deficiency.  If the collateral being foreclosed has value, be sure the bid of the foreclosing creditor has something to do with that value.

39 EAGLE 9® UCC Division Conclusions

 Carefully follow foreclosure sale rules.  Be careful about notice of sale.  Prepare proof of reasonable price.  Focus on the procedures of the sale – not just the price.  Note different measures of damages.  Assess the risk of counterclaims.  Use “safe harbors” where possible.

40 EAGLE 9® UCC Division Commercial Reasonableness A commercially reasonable sale may include the following:  Marketing method  Advertising in trade publications and newspapers  Retention of brokers  Electronic forum  Providing property profiles to prospective purchasers and access to subject property  “war room” – provide sufficient due diligence materials and time to allow potential buyers to review  Disclaimer of warranties (§9-610(e))  Appropriate UCC insurance

41 EAGLE 9® UCC Division Commercially Reasonable Sale

§9-627(c)(1): A collection, enforcement, disposition, or acceptance is commercially reasonable if it has been approved in a judicial proceeding.

42 EAGLE 9® UCC Division Commercially Reasonable Sale

MORAL: A foreclosing lender should make sure that at each point in the foreclosure process its actions are carefully considered to minimize the chances of a challenge for lack of commercial reasonableness.

43 EAGLE 9® UCC Division Strict Foreclosure:

Partial vs. Full Satisfaction – affirmative consent vs. passive acceptance (§9-620) • Notice (§9-621) • Acceptance – debtor and others (§9- 620) Best way to go if Debtor consents

44 EAGLE 9® UCC Division

Donald J. Rapson commented that strict foreclosure “provides a method of enforcement that is nonadversarial, requires lower transaction costs, and is not likely to result in litigation.”*

* Default and Enforcement of Security Interests Under Revised Article 9, 74 Chi.- Kent L. Rev. 893. 923 (1999).

45 EAGLE 9® UCC Division Strict Foreclosure: Notification of Proposal (§9-621)* -  any person with an interest in the collateral who has notified the Secured Party;  any other lienholder that, 10 days before the Debtor consented to the acceptance, held a lien on the collateral perfected by the filing of a Financing Statement; and  any other secured party that, 10 days before the Debtor consented to the acceptance, held a security interest in the collateral perfected by compliance with a statute, regulation, or treaty described in §9-311(a).  In addition, if in partial satisfaction, to any secondary obligor.

*UCC Foreclosure Notice Insurance Policy™ 46

EAGLE 9® UCC Division Strict Foreclosure:

Who must consent:  Debtor under §9-620

 Person to whom notice is required under §9-621

 Any other person holding a subordinate interest in the collateral

47 EAGLE 9® UCC Division Strict Foreclosure:

• Strategic Advantages to Secured Party • Debtor’s Strategic Assertion of Objection to Acceptance

48 EAGLE 9® UCC Division Settlement Procedures Compared

Deed in lieu Acceptance of Collateral, § 9-620 System Purpose

Formal requirements

Consumer exceptions

49 EAGLE 9® UCC Division Settlement Procedures Compared

Deed in lieu Acceptance of Collateral, § 9-620 System Real estate Purpose

Formal requirements

Consumer exceptions

50 EAGLE 9® UCC Division Settlement Procedures Compared

Deed in lieu Acceptance of Collateral, § 9-620 System Real estate Personal property Purpose Formal requirements

Consumer exceptions

51 EAGLE 9® UCC Division Settlement Procedures Compared

Deed in lieu Acceptance of Collateral, § 9-620 System Real estate Personal property Purpose Settlement that avoids foreclosure Formal requirements

Consumer exceptions

52 Settlement Procedures EAGLE 9® UCC Division Compared Deed in lieu Acceptance of Collateral, § 9-620 System Real estate Personal property Purpose Settlement that Settlement that avoids avoids foreclosure foreclosure Formal requirements

Consumer exceptions

53 EAGLE 9® UCC Division Settlement Procedures Compared

Deed in lieu Acceptance of Collateral, § 9-620 System Real estate Personal property Purpose Settlement that Settlement that avoids avoids foreclosure foreclosure Formal Deed requirements Consumer exceptions

54 EAGLE 9® UCC Division Settlement Procedures Compared

Deed in lieu Acceptance of Collateral, § 9-620 System Real estate Personal property Purpose Settlement that Settlement that avoids avoids foreclosure foreclosure Formal Deed 1. Authenticated agree- requirements ment partial satisfaction 2. Lack of objection if in full satisfaction Consumer exceptions

55 EAGLE 9® UCC Division Settlement Procedures Compared

Deed in lieu Acceptance of Collateral, § 9-620 System Real estate Personal property Purpose Settlement that Settlement that avoids avoids foreclosure foreclosure Formal Deed 1. Authenticated agree- requirements ment partial satisfaction 2. Lack of objection if in full satisfaction Consumer No exceptions

56 Settlement Procedures EAGLE 9® UCC Division Compared

Deed in lieu Acceptance of Collateral, § 9- 620 System Real estate Personal property Purpose Settlement that avoids Settlement that avoids foreclosure foreclosure Formal Deed 1. Authenticated agree-ment requirements partial satisfaction 2. Lack of objection if in full satisfaction Consumer No 1. Waiver needed if debtor exceptions has paid 60% 2. No partial satisfaction 3. Not while debtor has the collateral

57 Settlement Procedures EAGLE 9® UCC Division Compared

Deed in lieu Acceptance of Collateral, § 9-620 System Real estate Personal property Purpose Settlement that avoids Settlement that avoids foreclosure foreclosure Formal Deed 1. Authenticated agree-ment requirements partial satisfaction 2. Lack of objection if in full satisfaction Consumer No 1. Waiver needed if debtor exceptions has paid 60% 2. No partial satisfaction 3. Not while debtor has the collateral

58 Procedures for Acceptance EAGLE 9® UCC Division (Consent)

Lack of Objection Actual Agreement (only for full satisfaction) (for partial or full satisfaction)

59 Procedures for Acceptance ® EAGLE 9 UCC Division (Consent)

Lack of Objection Actual Agreement (only for full satisfaction) (for partial or full satisfaction) Secured party consent: Secured party sends unconditional proposal to accept in full satisfaction §9-620(b)(1).

60 Procedures for Acceptance EAGLE 9® UCC Division (Consent)

Lack of Objection Actual Agreement (only for full satisfaction) (for partial or full satisfaction) Secured party consent: Secured party sends unconditional proposal to accept in full satisfaction §9-620(b)(1).

Debtor consent: Secured party receives no objection to proposal within 20 days, § 9-620(c)(2)(C).

61 EAGLE 9® UCC Division Procedures for Acceptance (Consent)

Lack of Objection Actual Agreement (only for full satisfaction) (for partial or full satisfaction) Secured party consent: Secured party consent: Secured party sends Secured party consents in unconditional proposal to an authenticated record §9- accept in full satisfaction 620(b)(1). §9-620(b)(1). Debtor consent: Secured party receives no objection to proposal within 20 days, § 9-620(c)(2)(C).

62 Procedures for Acceptance ® EAGLE 9 UCC Division (Consent)

Lack of Objection Actual Agreement (only for full satisfaction) (for partial or full satisfaction) Secured party consent: Secured party consent: Secured party sends Secured party consents in unconditional proposal to an authenticated record §9- accept in full satisfaction 620(b)(1). §9-620(b)(1). Debtor consent: Debtor consent: Debtor Secured party receives no agrees to terms in a record objection to proposal within authenticated after default, § 20 days, § 9-620(c)(2)(C). 9-620(c)(1).

63 Procedures for Acceptance ® EAGLE 9 UCC Division (Consent)

Lack of Objection Actual Agreement (only for full satisfaction) (for partial or full satisfaction) Secured party consent: Secured party consent: Secured party sends Secured party consents in unconditional proposal to an authenticated record §9- accept in full satisfaction 620(b)(1). §9-620(b)(1). Debtor consent: Debtor consent: Debtor Secured party receives no agrees to terms in a record objection to proposal within authenticated after default, § 20 days, § 9-620(c)(2)(C). 9-620(c)(1).

64 EAGLE 9® UCC Division Results of Foreclosure:

• Discharges the security interest under which the disposition is made; • Transfers to a transferee for value all of the debtor’s rights in the collateral; and • Discharges any subordinate security interest or other subordinate lien.

65 EAGLE 9® UCC Division 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).

 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 commercially reasonable (§9- 610(b).

66 EAGLE 9® UCC Division Foreclosure On Equity – Securities Law Implications:

 Read Lynn Soukup’s article.

 Ability of lender to acquire equity interests at public or private sale (§9-610(c)).

 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.

 UCC Article 8 implications for the lien interest itself (protected purchaser status, etc.). 67

EAGLE 9® UCC Division Foreclosure On Equity – Securities Law Implications:

The SEC has stated in some older no action letters that registration will not be necessary where: (i) the public sale is necessary to assure that the "foreclosure" is commercially reasonable within the meaning of applicable UCC provisions, (ii) the shares will be sold as a block, (iii) an investment letter will be received from the purchaser stating that the securities have been purchased for investment and not with a view toward distribution, (iv) the certificates will bear a standard 1933 Act legend, and (v) the public notices states that the secured party reserves the right to bid in for the securities.

68 EAGLE 9® UCC Division Foreclosure On Equity:

NOTE #1: If 100% of the equity is not in play, without the necessary consents from other partners or members, the successful purchaser at a foreclosure sale may not be able to succeed to the right or powers of a partner or member and is only entitled to receive proceeds and distributions.

69 EAGLE 9® UCC Division Foreclosure On Equity:

NOTE #2: Complexities may arise due to the “carving up” of the capital structure, including conflicts of interest between a servicer/collateral agent that also holds an interest in a mortgage or mezzanine tranche and another holder of an interest in a mezzanine tranche.

70 EAGLE 9® UCC Division Foreclosure On Equity:

AND THEN THE MEZZANINE BORROWER FILES BANKRUPTCY!

A TOPIC FOR ANOTHER PROGRAM

71 EAGLE 9® UCC Division

UCC EAGLE 9®

NEW PROGRAMS, NEW SOLUTIONS!

72 EAGLE 9® UCC Division RESOURCES

 Domain Name (URL): www.eagle9.com  E-mail Address: [email protected]  Toll Free Number: 800.700.1191  UCC Division Legal Team:  Randy Scott, President & Counsel  Jim Prendergast, Senior Vice President and General Counsel  Brad Gibson, Vice President and Associate General Counsel

73 EAGLE 9® UCC Division Marketing

 Jill Sharif, Vice President, National Sales Director, 703.480.9541  Gina Sanchez, National Marketing Coordinator, 714.250.8640

74 EAGLE 9® UCC Division Contact Us

James S. Cochran Partner O'Connor Cochran [email protected]

James D. Prendergast SVP, Legal Counsel-UCC Division First American Title Insurance Company [email protected]

Steven O. Weise Partner Proskauer Rose [email protected]

75