Intro

Cases of Interest

Local Filing Issues


A UCC Article of Interest

Spotlight


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Vol 4, Issue 2

Welcome again to the Newsletter of the UCC Division of First American Title Insurance Company. The Newsletter is intended as a service to our legal and financial institution customers. We hope that you find the Newsletter useful and, as always, we solicit your comments as to how we may make the Newsletter of greater use.

We wish to thank the contributors to this issue of the Newsletter, including Stephen L. Sepinuck, Professor, Gonzaga University School of Law and Chair of the U.C.C. Committee of the Business Law Section of the American Bar Association, and Kristen Adams, Professor, Stetson University College of Law and Chair of the Subcommittee on General Provisions & Relations to Other Law of the Business Law Section for allowing us to republish their March 2008 issue of Spotlight. We also want to thank again our good friend Steven O. Weise of Heller Ehrman LLP, Los Angeles office, and his co-authors, Teresa Wilton Harmon of Sidley Austin LLP, Chicago, and Lynn A. Soukup of Pillsbury Winthrop Shaw Pittman LLP, Washington D.C., for supplying the case summaries for our continuing review of recent cases in commercial and bankruptcy law. The case summaries are part of their presentation to the Spring Meeting of the Business Law Section of the American Bar Association titled 2007 Commercial Law Developments. Jennifer Klemp, head of our Search and Filing Division, offers a word scramble on Search and Filing issues; and Jim Prendergast, our General Counsel, provides an article at the end of this newsletter titled “UCC Mezzanine Insurance: The Cost-Effective Answer to an Opinion of Borrower’s Counsel.”

As the real estate downturn and credit crisis curtails commercial real estate transactions, especially CMBS securitizations, and the general slowdown in the economy depresses operating cash flows from commercial real estate projects, we thought it would be useful to remind our readers of the risk management capabilities of our UCC insurance products for troubled loans. We can insure Secured Creditor status under Article 9 and Protected Purchaser status under Article 8 at any point in the life cycle of a commercial loan. There is no more effective file review process than to have our UCC Division professionals review a troubled loan file and provide UCC protection coverage. You will quickly find out your status as a Secured Creditor and Protected Purchaser, and if the news is not the best, you may still have time to correct the file while you are on good speaking terms with the borrower/debtor.

Further, if you have been involved, as lender or counsel, in real estate mezzanine lending, and your now troubled loan treated the pledged equity as a General Intangible rather than Investment Property under Article 9 of the UCC, you may still have time to restructure as the mezzanine borrower circles the drain. Remember the prime directive – it is easier to do things before the filing of a petition in bankruptcy.

Recent market conditions have shifted the bargaining power to the lender and UCC insurance can be issued after the loan has been closed to insure over structural problems incurred at the inception of the loan. The use of our UCC insurance LENDER’S POLICY to retroactively fix the structure of a real estate loan transaction may be the difference between an effective exit strategy, both as a perfected Secured Creditor and as a Protected Purchaser, in the event of borrower default, and no realizable exit strategy at all. The baseline for the “correct” manner for a lender to structure a real estate mezzanine loan transaction is set forth in the report by Moody’s Investors Service titled “US CMBS and CRE CDO: Moody’s Approach to Rating Commercial Real Estate Mezzanine Loans,” (the “Moody’s Report”). A copy of the Report can be obtained from our web site. The problem with lending on General Intangible equity collateral is that you could be subordinated to a subsequent lender who perfects its security interest in the same equity collateral through control of Investment Property. It is now possible to insure your Protected Purchaser status retroactively. Certification of the pledged equity is a meaningless endeavor under the UCC, if the collateral is a General Intangible. However, if the issuer subsequently “opts in” to Article 8, we can insure control perfection and enhance your existing Article 9 Secured Creditor status with insurance.

Given our ability to retroactively fix problem loan structure, UCC insurance can be an effective means of file review and repair while the borrower is still talking to the lender. Just because you either did not get UCC insurance at inception of the loan or got less than sufficient UCC insurance at the time, you can bring to bear retroactively the risk management functionality of our UCC insurance products to resolve problems and put the lender in the strongest possible position facing a workout or insolvency. Don’t wait until the trustee in bankruptcy comes knocking, call First American.

In addition to assisting in file review during the workout process and insuring retroactively the Protected Purchaser and Secured Creditor status of the lender, we can, through our BUYER’S POLICY, insure not only that the assets being acquired at a foreclosure sale, or a §363 sale, are free of lien, thereby insuring the adequacy of the Notice List and perhaps replacing a foreclosing creditor’s indemnity; but also that the buyer is a Protected Purchaser under Article 8. The applicability of Article 8 to the acquisition of equity interests is clear. Having the buyer of the equity attain the status of a Protected Purchaser is of significant protective value, especially when coupled with our Buyer’s Policy and Equity Ownership Endorsement.

In one significant transaction, real property valued in excess of $400,000,000 was being transferred through the transfer of the equity ownership interests in the entities that owned the realty. The buyer requested a securities law opinion from the seller. The seller was represented by a very fine real property boutique law firm that froze when asked to provide a securities law opinion. We provided a Buyer’s Policy with our Equity Ownership Endorsement to insure the lien status of the equity being acquired and that the buyer “owned” the acquired equity as a Protected Purchaser at date of acquisition. The deal closed thanks to our EAGLE9® Buyer’s Policy

Our FORECLOSURE NOTICE INSURANCE POLICY, and we alone offer this policy, facilitates the foreclosing creditor under Part 6 of Article 9 to meet certain of the statutory requirements for a commercially reasonable notice. The specific notice requirements covered by the policy involve notice to secured parties and lienholders of record for either public or private sales and for acceptance of collateral in full or partial satisfaction of the obligation secured. As part of the underwriting effort, we will search the appropriate Filing Office and advise the Insured through the Foreclosure Notice Report, which is attached to the policy, of the secured parties and lienholders of record who are to be notified.

As mentioned above, First American can review your existing mezzanine loan file and advise you of your current Secured Creditor/Protected Purchaser status. We can then suggest additional steps to obtain retroactive or revised UCC insurance insuring both your enhanced Secured Creditor status of perfection in the pledged equity collateral through control of Investment Property collateral, and your lender’s Protected Purchaser status under Article 8. We really believe in the motto: Better Late than Never. Give us a call.