Commercial Mortgage Modifications: Lien Priority, Title Insurance and Bankruptcy …media.straffordpub.com/products/commercial-mortgage... · 2019. 2. 7. · ⧫ Trustee or DIP in

Commercial Mortgage Modifications: Lien

Priority, Title Insurance and Bankruptcy

IssuesStructuring Modification Agreements While Avoiding Legal Pitfalls

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THURSDAY, FEBRUARY 7, 2019

Presenting a live 90-minute webinar with interactive Q&A

Aimee Contreras-Camua, Partner, Pircher Nichols & Meeks, Los Angeles

Erin F. Natter, Partner, Pircher Nichols & Meeks, Los Angeles

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Commercial Mortgage Modifications__________________________________________________________

Strafford Webinar:

“Commercial Mortgage Modifications:

Lien Priority, Title Insurance and Bankruptcy Issues”

February 7, 2019

Aimee Contreras-Camua, Esq.

[email protected]

Erin F. Natter, Esq.

[email protected]

© 2019 Nothing herein is to be construed as legal, tax, investment, business or insurance advice.

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TYPES OF COMMERCIAL MORTGAGE LOAN MODIFICATIONS

⧫ Technical Modification⧫ Correcting Scrivener's errors or perfection defects

⧫ Contemplated in the loan documents (Example: updating the legal description due

to a lot line adjustment)

⧫ Extension of Maturity Date

⧫ Material Economic Terms Modification ⧫ Increase loan amount, additional funds added to debt

⧫ Change interest rate

⧫ Other Material Modifications ⧫ Adding collateral or releasing collateral

⧫ Implementing cash management

⧫ Modifying disbursement provisions for additional advances

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TECHNICAL/ EXTENSION OF MATURITY DATE MORTGAGE LOAN MODIFICATIONS

⧫ Documentation

⧫ Unrecorded and/or recorded

⧫ Guarantor/pledgor reaffirmations

⧫ Title Endorsement

⧫ Cautionary Tale/Example

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MATERIAL MORTGAGE LOAN MODIFICATIONS: FUNDAMENTAL ISSUES

⧫ What are the lender’s and borrower’s strategic objectives?

⧫ Diligence and inventory the current state of the loan file, the collateral

and parties.

⧫ Pre-Negotiation Letter Agreement, Modification of Loan Documents,

and/or Forbearance Agreement


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MATERIAL MORTGAGE LOAN MODIFICATIONS: FUNDAMENTAL ISSUES

⧫ Issues to Consider/ Pre-Foreclosure Considerations

⧫ Additional collateral, additional guaranties and/or equity pledge

⧫ Unpaid taxes

⧫ Estoppels and Subordination Non-disturbance and Attornment

Agreements

⧫ Governing law


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MATERIAL MORTGAGE LOAN MODIFICATIONS: LIEN PRIORITY ISSUES

⧫ Lien/Claim Subordination

⧫ Protecting Lien and Claim Priority

⧫ Intercreditor Agreements

⧫ Bi-furcated Loan Priority Issue

⧫ Construction Loan Stop Notice Issue


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MATERIAL MORTGAGE LOAN MODIFICATIONS: TITLE INSURANCE

⧫ Modification Endorsement

⧫ Endorsement for Additional Advances

⧫ ALTA 2006 Creditor’s Rights Exclusion

⧫ No creditor’s rights coverage for loss or damage arising out of any claim (including

a claim to avoid, invalidate, or subordinate a mortgage or deed of trust) which

arises out of a transaction creating the interest of the insured lender or owner by

reason of federal bankruptcy or state insolvency, or similar creditor’s rights laws

(such as fraudulent transfers, preferential transfers, equitable subordination).

⧫ Mechanics Lien Coverage


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MORTGAGE LOAN MODIFICATIONS: BANKRUPTCY ISSUES- PREFERENCE CLAIMS AND

SPECIAL RISK AREAS

⧫ Preference claims avoid payments or transfers to a creditor on account

of pre-existing debt made while the debtor was insolvent and within 90

days before bankruptcy for creditors generally and one year for

“insiders” to the debtor.

⧫ Exception for a transfer for “subsequent new value”

⧫ Special risk areas include:

⧫ Payments/property transfers on account of pre-existing debt

⧫ Additional collateral

⧫ New lien in exchange for old one not accompanied by new debt

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MORTGAGE LOAN MODIFICATIONS: BANKRUPTCY ISSUES- STRATEGY TO MITIGATE AGAINST

A PREFERENCE CLAIM

⧫ New collateral in exchange for new value

⧫ Careful analysis of debtor’s financial condition

⧫ Prompt perfection of security interest/deed of trust/mortgage post-

closing


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MORTGAGE LOAN MODIFICATIONS: BANKRUPTCY ISSUES- TYPES OF FRAUDULENT TRANSFER

⧫ Intentional Fraud: for purpose of hindering, delaying, or defrauding

creditors

⧫ Constructive Fraud: deemed fraud based on facts and circumstances

indicating that the debtor is “insolvent”, AND

⧫ has not received “reasonable equivalent value” in exchange;

⧫ engaged in business for which debtor’s remaining property was “unreasonably

small capital”; OR

⧫ intended to incur debts that would be beyond debtor’s ability to pay


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MORTGAGE LOAN MODIFICATIONS: BANKRUPTCY ISSUES- FRAUDULENT TRANSFER

What does “insolvent” mean?

⧫ “Insolvent” means, at a given moment in time: “. . . financial

condition such that the sum of such entity’s debts is greater that all of

such entity’s property, at a fair valuation. . .” excluding exempt

property (under bankruptcy law) and any property that was

fraudulently transferred.

⧫ Calculation of insolvency includes contingent liabilities (such as a

guaranty obligation), but at something less than face value.

⧫ Additional risk factor- “Equitable Insolvency”

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MORTGAGE LOAN MODIFICATIONS: BANKRUPTCY ISSUES- FRAUDULENT

TRANSFER/PREFERENCE REMEDY

⧫ The exchange is set aside by the Bankruptcy Court

⧫ Transferee must disgorge or pay a higher amount, depending on

applicable law and circumstances.

⧫ Transferee Defenses to Fraudulent Transfer Claim

⧫ Gave value and was “in good faith”

⧫ Did not know (and should not have known) of debtor’s insolvency

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MORTGAGE LOAN MODIFICATIONS: BANKRUPTCY ISSUES- FRAUDULENT TRANSFER LIABILITY

⧫ Upstream or cross-stream guaranties supported by deed of trust or

mortgage; In re Tousa, Inc. (2012)

⧫ Deed of trust grantor or mortgagor not receiving loan proceeds

⧫ Additional collateral- securing antecedent debt constitutes “value” if

securing your own or downstream subsidiary debt.


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MORTGAGE LOAN MODIFICATIONS: BANKRUPTCY ISSUES- STRATEGY TO MITIGATE AGAINST

FRAUDULENT TRANSFER/PREFERENCE LIABILITY

⧫ Thorough analysis of debtor’s financial statements

⧫ Updated property appraisals/ or broker price opinion

⧫ Solvency opinion

⧫ Structure workout settlement/modification based on the “Earmarking

doctrine” (pre-bankruptcy transfer may not be avoided as preference

or fraudulent conveyance if payment supplied and “earmarked” for

distribution to the creditor by non-debtor third party)

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MORTGAGE LOAN MODIFICATIONS: BANKRUPTCY ISSUES- FAILURE TO RECORD OR PERFECT

LIENS AGAINST BANKRUPTCY

⧫ Trustee or DIP in bankruptcy/reorganization case may void

unperfected liens.

⧫ Automatic stay in bankruptcy precludes post-petition filing or

perfection by creditor.

⧫ Frequent issues of landlord lien creditors, unperfected UCC Article 9

secured creditors, and holders of badly drafted or unrecorded deeds of

trust or mortgages.

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MATERIAL MORTGAGE LOAN MODIFICATIONS: BANKRUPTCY ISSUES- EQUITABLE SUBORDINATION

⧫ Claim based on allegations of inequitable conduct by the creditor to

the detriment of other creditors:

⧫ Fraud, illegality, or breach of fiduciary obligation

⧫ Actions resulting in undercapitalization of the debtor

⧫ Creditor’s use of debtor as “alter ego”

⧫ Likely of success of equitable subordination claim rises as proximity

of relationship between debtor and creditor increases.

⧫ Remedy against creditor is loss of stated lien priority and

subordination to other creditors by the Bankruptcy Court.

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MATERIAL MORTGAGE LOAN MODIFICATIONS: TAX AND OTHER ISSUES

⧫ There may be unintended tax implications in connection with entering

into a loan modification if the loan modification is seen as entering

into new debt, and the lender has been deemed to have realized gain.


⧫ Waste; Nippon Credit Bank v. 1333 N. Cal. Blvd. (2001)


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ADDITIONAL INFORMATION

For additional information about Aimee Contreras-Camua or Erin F. Natter,

or about Pircher, Nichols & Meeks, LLP please visit http://www.pircher.com

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