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John C. Jack Murray Law Library

John C. ("Jack") Murray is vice president and special counsel for First American Title Insurance Company in the company's Chicago National Commercial Services office. Mr. Murray received his bachelor of business administration (with distinction) and law degrees from the University of Michigan. He is a member of the Michigan, Illinois, Chicago and American Bar Associations (where he serves as co-chair of the Non-Traditional Financing Committee of the Real Property, Probate and Trust Law Section, Group Chair of the Commercial Real Estate Transactions and Management Group, and real estate editor of the Real Property, Probate and Trust Journal), and is a member of the American College of Real Estate Lawyers (where he serves as chair of the Amicus Briefs Committee and co-chair of the Publications Committee).

He is a member of the International Association of Attorneys and Executives in Corporate Real Estate and the American Bankruptcy Institute. He is president-elect of the American College of Mortgage Attorneys, and serves on the Advisory Board of the John Marshall Law School Graduate Program in Real Estate Law. He has served as the regional chair of the Practising Law Institute's annual seminar on title insurance, and as a member of the Board of Editors of Shopping Center Law Report. He also is the former president of the Chicago Mortgage Attorneys' Association and serves on its Board of Directors. He has been elected a Fellow of the Michigan Bar Foundation and a Fellow of the American Bar Foundation, and is listed in Guide to the World's Leading Real Estate Lawyers.

Environmental Law

How environmental law affects commercial real estate properties.
Asbestos Legislation and Litigation Affecting Commercial Buildings
This article provides a summary of recent statutory, regulatory, and case law developments regarding the presence of asbestos-containing materials (ACM) in commercial buildings and the abatement, removal, containment, and monitoring of such materials. It is not intended to be an exhaustive analysis of all aspects of asbestos-related legal issues, which have been dealt with extensively in other publications.

Foreclosures, Deeds in Lieu, and Workouts

Attorney’s fees provisions in nonrecourse loans; real property v. UCC foreclosures; court decisions regarding “foreclosure consultants; deeds in lieu of foreclosure -- title insurance issues, practical and legal considerations, tax considerations and tax-free exchanges, and subsequent foreclosure of mortgage; documenting a successful transfer of distressed real estate; enforceability of pre-workout agreements; federal foreclosure actions; foreclosures, title transfers and modification structures (Parts 1 and 2); leasehold mortgage foreclosures; lender liability issues; lender liability issues in securitized mortgage loans; definition of “waste”; Michigan appellate court decision on foreclosure consultants; mortgage workouts: deeds in escrow; Ninth Circuit decision upholding priority of mortgage over federal forfeiture claim; non-payment of taxes as tortuous waste in nonrecourse mortgage loans; strategies for junior lienholders in foreclosure actions; the lender’s ten steps before acceleration; what you need to know about workout strategies.
Attorney's Fees Provisions in Nonrecourse Loans:Are They Enforceable? (43 Kb -- PDF) - opens in new window
This article discusses and analyzes the recent holding of a California appellate court, which refused to award a mortgage lender attorney's fees for prevailing in a bad-faith waste action against the borrower. Because the applicable California statutes did not provide for attorney's fees in a tort action for waste, the lender's entitlement to fees depended entirely on the contractual language. The court ruled that the "carveout" language in the mortgage did not extend to attorney's fees, either explicitly or implicitly, and therefore their recovery was barred by the nonrecourse provision of the mortgage. The article also contains drafting tips to preserve the lender's right to collect attorney's fees in a nonrecourse loan, and discusses steps to preserve these rights in connection with modification agreements.
Commercial Borrower Defaults: Real Property Foreclosure or UCC Foreclosure? (27 Kb -- PDF) - opens in new window
This article discusses the advantages and disadvantages of a lender pursuing a UCC sale instead of a mortgage foreclosure proceeding and explains how, in certain circumstances, it may make more sense to pursue the UCC sale.
Court Decisions and State Statutes Send Warning to 'Foreclosure Consultants' (139 Kb -- PDF) - opens in new window
This article discusses and analyzes an unreported decision by the Michigan Appellate Court, London v. Gregory. The court held in this case that where a third party had redeemed the property from foreclosure sale, in exchange for a lease of the property back to the mortgagor with an option to repurchase at a highly inflated price, the transaction constituted an equitable mortgage and the mortgagor could remain in possession of the property. This article also examines the law in general regarding equitable mortgages.
Deeds in Lieu of Foreclosure – Title Insurance Issues (44 Kb -- PDF) - opens in new window
This article discusses current issues in connection with deeds in lieu of foreclosure, including those (such as creditors’ rights coverage) that are of most concern to title insurance companies that are asked to insure these transactions.
Deeds in Lieu of Foreclosure: Practical and Legal Considerations: (186 Kb -- PDF) - opens in new window
For reasons advantageous both to the borrower and the lender, loan defaults are frequently resolved by a deed in lieu of foreclosure, the transfer to the lender of title to the real estate securing the debt. This article presents an encyclopedic discussion of the relevant concerns in a workout effectuated by a deed in lieu of foreclosure.
Deeds In Lieu of Foreclosure: Tax Considerations and Requirements
This article discusses and analyzes the tax implications to a mortgage lender of taking a deed in lieu of foreclosure.
Deeds in Lieu of Foreclosure: Tax-Free Exchanges:
This article discusses the structure of a like-kind exchange of property, under sec. 1031 of the Internal revenue Code, within the framework of a deed in lieu of foreclosure.
Deeds in Lieu: Subsequent Foreclosure of Subordinate Mortgage: (80 Kb -- PDF) - opens in new window
This article examines the issue of whether a mortgagee that takes a deed in lieu of foreclosure may subsequently foreclose a subordinate mortgage on the property. The article examines current case law in this area, and the issues of merger and the intention of the parties.
Documenting a Consensual Transfer of Distressed Real Estate
A comprehensive compilation of practical legal forms (many of which are annotated) used in connection with the resolution of distressed commercial real estate, including a pre-negotiation agreement, loan modification agreement, cash collateral agreement, deed in lieu of foreclosure agreement, and purchase and sale agreement.
Enforceability of Pre-Workout Agreements: Travelers v. Corporex (67 Kb -- PDF) - opens in new window
This article discusses and analyzes the federal district court's decision in Travelers Ins. Co. v. Corporex Properties, Inc. This is one of the few cases ever to rule on the enforceability of mortgage loan pre-workout agreements. The court in this case upheld the validity and enforceability of the lender's pre-workout agreement.
Enforcement of Multistate Mortgages: Questions and Answers (198 Kb -- PDF) - opens in new window
This article discusses the enforcement of multistate mortgages, including multiple foreclosures within the same state, one-action rules, and anti-deficiency statutes.
Federal Foreclosure Actions - Advantages and Disadvantages for Lenders
An analysis and discussion of recent Federal Court rulings in Illinois on receiverships, diversity jurisdiction and foreclosure sales that have encouraged commercial mortgage lenders to file foreclosure actions in federal instead of state court, as well as an examination of the risks involved in utilizing the Federal Court system for such actions.
Foreclosures, Title Transfers and Modification Structures, Part 2
This article discusses and analyzes the use and enforceability of pre-workout agreements between the lender and borrower, and applicability of credit agreement statutes with respect to lender liability claims by borrowers.
Foreclosures, Title Transfers and Modification Strutures, Part 1
Ground Lease Assignee Remains Liable to Lessor After Leasehold Mortgage Foreclosure
This article discusses a California Appellate court decision of first impression, Vallely Investments, L.P. v. Bancamerica Commercial Corp., which held that the assignee of a ground lessee's interest, who expressly assumed the lessee's obligations to the ground lessor in connection with a workout/foreclosure by the ground lessor of its leasehold mortgage with the lessee, remained liable to the ground lessor even after foreclosure of the ground lessee's position. The article also contains suggested alternatives that may have enabled the assignee to avoid this result.
Lender Liability
A detailed discussion and analysis of the various theories of lender liability, especially as they relate to construction lending. The article contains suggestions for minimizing the lender's exposure to such claims.
Lender Liability Issues in Securitized Mortgage Loans (80 Kb -- PDF) - opens in new window
This article examines recent case law that deals with lender liability issues in securitized loans. Because of the number of “players” in securitized loan transactions, there is more of a chance that such claims will occur. But as noted in the cases discussed in the article, the courts will still employ a traditional fact-based analysis and will not tolerate frivolous claims against the lender that are unsupported by the loan documentation or the special facts of the case.
Maryland Appellate Court Refuses to Expand Definition of 'Waste'
This article discusses a Maryland appellate court decision of first impression, which held that a mortgagor's failure to secure off-site parking for a commercial office building did not constitute waste or a breach of the mortgagor's duty of reasonable care of the property. The court refused to permit a tort action for "permissive" waste where there was no allegation that the property was in disrepair, that taxes were unpaid, or that monies were wrongfully withheld.
Michigan Appellate Court Sends Warning to 'Foreclosure Consultants'
In an unpublished decision, the Michigan Court of Appeals upheld a trial court decision declaring that a deed given by an owner in foreclosure would be treated as an equitable mortgage, where the facts indicated the parties had unequal bargaining power and there was inadequate consideration for the conveyance. The case is London v. Gregory, No. 2164732, 2001 WL 726940 (Mich. App., Feb. 23, 2001).
Mortgage Workouts: Deeds in Escrow (252 Kb -- PDF) - opens in new window
This article discusses the legal and bankruptcy issues faced by mortgage lenders in connection with obtaining a deed in escrow as part of a mortgage loan workout, or as part of the original loan transaction. Existing case law in this area throughout the United States is analyzed, and suggestions are offered to enhance the enforceability of such agreements. A sample form of Deed in Escrow Agreement is attached as an exhibit.
Ninth Circuit Uphold Priority of Mortgage Over Federal Forfeiture Claim
This article discusses and analyzes a recent U.S Ninth Circuit Court of Appeals ruling which upheld, under the facts of the case, the priority of a mortgage over a federal forfeiture claim and permitted the foreclosure sale purchasers to take title to the property free and clear of the government's interest. This decision brings some much needed guidance to mortgage lenders when dealing with forfeiture issues in the foreclosure context. The article also contains, as exhibits, sample forms of "anti-forfeiture" provisions for insertion in mortgage loan documents.
Nonpayment of Taxes as Tortious Waste in Nonrecourse Mortgage Loans (45 Kb -- PDF) - opens in new window
This article discusses a recent California appellate court decision, Nippon Credit Bank, Ltd. v. 1333 North California Boulevard, which found a mortgagor liable to the mortgagee for the tort of bad-faith waste based on the mortgagor's failure to pay real estate taxes while the nonrecourse loan it obtained from the mortgagee was delinquent. The article also discusses the trend in recent case law to blur the distinction between "active" and "passive" waste, and to hold that "economic" waste, such as the failure of the mortgagor to pay taxes, may be actionable as a violation of the duty not to commit waste or impair the value of the property
Strategies for Junior Lienholders in Foreclosure Actions
A summary, in outline form, of existing case law regarding the rights of subordinate lienholders with respect to substantive and non-substantive modifications to senior loan documents, including the requirement of notice to and the consent of such subordinate lienholders
Trouble Ahead: The Lender's First Ten (and then some) Steps Before Acceleration
This article summarizes the steps that a mortgage lender should take when the loan becomes delinquent, in order to protect its rights and remedies in the event of foreclosure and/or the borrower's bankruptcy, and enable it to implement a strategy to maximize the likelihood of recovering the indebtedness.
What Do You Need to Know About Workout Strategies?
What Do You Need to Know About Workout Strategies?

Leases and Rents

Enforceability under state law of assignments of rent; enforceability of assignments of rent in bankruptcy; special issues with respect to hotel revenues; enforceability of estoppel certificates; effect of mortgagee's remedies on leases; enforceability of letters of intent; insurance of a secured lender's security interest in rent pursuant to a separate assignment agreement; lease options and rights of first refusal; nonassignability clauses in commercial leases; the definition of "rents," and percentage-rent provisions in shopping center leases.
Absolute Assignments of Hotel Revenues: Are they Enforceable in Bankruptcy?
This article discusses a recent bankruptcy decision, In re 5877 Poplar, L.P., which ruled that an "absolute" assignment of hotel revenues was in reality an assignment for security purposes as part of the mortgage loan to the debtor, and that therefore the hotel revenues constituted cash collateral that was part of the debtor's bankruptcy estate. The article goes on to discuss the law in other jurisdictions on this issue, and the amendments to the Bankruptcy Code that attempted to resolve these types of disputes.
California Appellate Courts Rule on Enforceability of Estoppel Certificates
This article discusses a recent California appellate court ruling, which held that the tenant of a commercial property was estopped from contradicting the termination date of the lease as stated in a tenant estoppel certificate it signed in connection with a sale of the property to the current owner. The court held that the estoppel certificate qualified as an "instrument" under the California Evidence Code, which provides that the facts recited in a written instrument are true as between the parties or their successors.
Effect of Mortgagee's Remedies on Leases
An analysis of the case and statutory law affecting the rights and obligations of a foreclosing mortgagee with respect to leases in effect on the secured property, including the ability of the mortgagee to elect, through selection of a judicial or non-judicial foreclosure proceeding, to "wipe out" or retain the lease
Enforceability of Letters of Intent in Lease Transactions
This article discusses a recent case, Officemax, Inc. v. Sapp, which held that a letter of intent to lease office space was unenforceable by the intended lessee because the terms of the letter of intent were too vague and indefinite. The court also held that a "non-shop" clause in the letter of intent was unenforceable because it did not specify a duration and was lacking in mutuality because it contained no explicit promise by the proposed tenant not to look at other properties.
Illinois Appelate Court Rules on Assignments of Rents
A discussion of a recent Illinois Appelate Court decision refusing to permit a mortgagee to enforce a contractual assignment-of-rents document that authorized the mortgagee to collect post-default rents without obtaining possession or court approval, and an analysis of how the decision relates to other areas of state and federal bankruptcy law.
Insurance of a Secured Lender's Interest in Rents Pursuant to a Separate Assignment of Rents
A discussion of the availability of title insurance coverage and/or endorsements with respect to the interest of a commercial lender in the rents, income and profits generated by the secure property.
Nonassignability Clauses in Commercial Leases: When is an Assignment not an Assignment?: (30 Kb -- PDF) - opens in new window
This article discusses Stone v. Simmons, an Illinois Appellate Court Rule 23 opinion holding that a nonassignability clause in a lease does not prohibit the tenant's collateral assignment of its interest as security for a loan.
Option or Right of First Refusal: Which Is It?
This article examines and analyzes a recent state court decision regarding the issue of whether a clause in a lease provided the tenant with an option to purchase or a right of first refusal. The court held that the right granted was a right of first refusal and not an option, even though a specific purchase price was set forth in the provision. This article also discusses the difference between options, rights of first refusal, and similar rights, and contains drafting tips for these types of clauses.
Percentage Rent Provisions in Shopping Center Leases: A Changing World? (222 Kb -- PDF) - opens in new window
This article provides an updated analysis of percentage rent provisions in shopping center leases, and advises calculation methods for determining percentage rents according to an acceptable definition of gross sales (including Internet sales). It also discusses pertinent case law to illustrate drafting and enforcement issues regarding percentage rent provisions, concomitant audit rights of the parties, and the consequences of continous operation covenants. Finally, this article provides a discussion of the remedies for default in percentage rent payments and the implication of potential bankruptcy issues.
The Definition of 'Rents': Another Trap for the Unwary Lender?
Another Trap for the Unwary Lender? This article demonstrates how the terms "rents" or "rents, issues and profits," as defined in a lease, mortgage or an assignment of rents, can affect the rights of lenders, creditors, lessors and owners when given the various constructions placed on those terms by state courts, federal courts and bankruptcy courts. The article concludes by offering some valuable negotiating and drafting strategies for landlords, lenders and tenants.

Limited Liability Companies

The history and development of LLCs; statutes and case law pertaining to LLCs; series LLCs; tax rulings on LLCs; bankruptcy issues in connection with LLCs; and title-insurance issues in connection with LLC real-estate transactions.
'Piercing the Corporate Veil' of a Limited Liability Company
This article describes and analyzes an unreported Connecticut decision, which held that under appropriate circumstances the court could "pierce the corporate veil" of a limited liability company and hold the individual members personally liable, and could permit attachment of the assets of the individual members during pending litigation against the limited liability company.
'Restrictions on the Use of an LLC as an Asset-Protection Vehicle'
This article discusses a Colorado bankruptcy court decision, In re Ashley Albright, which held that the debtors' interest in and control of a limited liability company, of which the debtor was the sole member, passed to the trustee as a "substituted member" upon the debtor's bankruptcy and entitled the trustee to sell the LLC's real property and distribute the net proceeds to the bankruptcy estate. The article also discusses case and statutory law that affects the ability of a single-member LLC to continue in existence notwithstanding the bankruptcy or death of the sole member of an LLC, or the termination of the sole member's membership interest
Assignment of an LLC Member's Rights to Profits, Losses, and Distributions: A Violation of the Due-on-Sale Clause?
This article discusses the difference between the transfer of an LLC member's "ownership interest" in the LLC and the assignment or transfer of its interest in the profits, distributions and losses of the LLC. The article also discusses how state LLC statutes distinguish whether, and under what circumstances, a transfer of an LLC member's entire interest has occurred, and how bankruptcy courts treat attempted transfers or assignments of LLC interests. The article further discusses how careless drafting of a mortgagee's due-on-sale clause may not prevent the transfer by an LLC member of its rights in the entity's profits, distributions and losses.
Change of Entity: Mergers and Conversions
This article contains a brief summary and analysis of state conversion and merger statutes, which permit transfers from existing legal entities, such as general and limited partnerships, to limited liability companies. The article also discusses the ramification of these statutes with respect to title insurance coverage and the payment of transfer taxes.
Change of Entity: Mergers and Conversions
This article contains a brief summary and analysis of state conversion and merger statutes, which permit transfers from existing legal entities, such as general and limited partnerships, to limited liability companies. The article also discusses the ramification of these statutes with respect to title insurance coverage and the payment of transfer taxes.
IRS Issues Final Elective Classification Rules for Business Entities
A discussion of the regulations issued by the Internal Revenue Service, effective July 1, 1997, which provide that any eligible business entity not required by IRS regulations to be treated as a corporation for federal tax purposes may elect to be treated as a partnership for tax purposes
IRS Issues Final Elective Classification Rules for Business Entities
A discussion of the regulations issued by the Internal Revenue Service, effective July 1, 1997, which provide that any eligible business entity not required by IRS regulations to be treated as a corporation for federal tax purposes may elect to be treated as a partnership for tax purposes.
Legal and Title-Insurance Issues in Limited Liability Company Real-Estate Transactions: (289 Kb -- PDF) - opens in new window
A discussion of title insurance issues in connection with the formation and use of a limited liability company to own title to real estate and obtain financing.
Limited Liability Companies: Bankruptcy Issues (112 Kb -- PDF) - opens in new window
This article discusses the treatment of limited liability companies ("LLCs") under the Bankruptcy Code, including single-member LLCs, the effect of a filing by a member of an LLC, lender concerns in structuring LLC borrowing entities, authority to file on behalf of an LLC, the efficacy of LLCs as asset-protection vehicles, and the feasibility of a lender becoming an LLC member. The article also analyzes the applicable case law in these areas.
Limited Liability Companies: Eligibility to File Banckruptcy; Unauthorized Practice of Law by Manager
This article discusses and analyzes an Ohio bankruptcy court decision holding that 1) the debtor, an Ohio limited liability company, was eligible to be a debtor under the Bankruptcy Code but was not entitled to file a pro se bankruptcy petition, and 2) as a matter of first impression, the company's manager engaged in the unauthorized practice of law by filing the bankruptcy petition on behalf of the limited liability company.
The Delaware Series LLC (156 Kb -- PDF) - opens in new window
This article discusses the provisions of the Delaware Limited Liability Act that permit the establishment within a limited liability company ("LLC") of designated series of specified properties or operations with separate business purposes or investment objectives, such that the debts, liabilities and obligations relating to a particular series would be enforceable only against the assets of such series and not against the assets of the LLC generally or the assets of any other series. The article also discusses the possible uses and benefits of such series, as well as some of the unresolved issues raised by the creation of series within an LLC.
Title-Insurance Endorsements for Limited Liability Company Transactions
This article describes specific forms of title-insurance endorsements (including the "Fairway" endorsement, the non-imputation endorsement, and the additional-insured endorsement) available (in most jurisdictions) for use in real estate transactions involving limited liability companies. The article also discusses and analyzes recent case law with respect to title issues involving LLCs, as well as transfer-tax issues affecting these entities.

Mortgages and Financing

Can a Commercial Borrower be Required to Obtain Terrorism Insurance?:
This article addresses the issue of whether a mortgage insurance clause could be deemed to permit the mortgagee to require that the mortgagor obtain terrorism insurance where, at the time the mortgage was executed, the applicable provision did not expressly require terrorism insurance but required the mortgagor to maintain insurance coverage generally available at commercially reasonable premiums. The article discusses a New York appellate court opinion that ruled that the mortgagor should not be forced to purchase terrorism insurance under such circumstances, as well as a New York federal district court opinion that held that such language in the mortgage justified the lender's requirement of terrorism insurance even where the applicable "all risk" policies were amended to exclude such coverage. The article also notes that the Terrorism Risk Act of 2002 prohibits terrorism exclusions from insurance policies and written notice from the insurer of any increased premium for such coverage.
Assignments-of-Rent in Illinois (An Update) (33 Kb -- PDF) - opens in new window
This article discusses recent case law in Illinois regarding the issue of whether "absolute" (as opposed to "conditional") assignments of rents in connection with mortgage loans are enforceable (especially where there is a bankruptcy proceeding filed by or against the mortgagor), and the issue of what steps must be taken to "activate" a properly perfected assignment-of-rents document so that, as between the mortgagor and mortgagee, the lender will be entitled to take ownership of and collect the rents from the tenants at the property.
Can a Commercial Borrower be Required to Obtain Terrorism Insurance?
This article addresses the issue of whether a mortgage insurance clause could be deemed to permit the mortgagee to require that the mortgagor obtain terrorism insurance where, at the time the mortgage was executed, the applicable provision did not expressly require terrorism insurance but required the mortgagor to maintain insurance coverage generally available at commercially reasonable premiums. The article discusses a New York appellate court opinion that ruled that the mortgagor should not be forced to purchase terrorism insurance under such circumstances, as well as a New York federal district court opinion that held that such language in the mortgage justified the lender's requirement of terrorism insurance even where the applicable "all risk" policies were amended to exclude such coverage. The article also notes that the Terrorism Risk Act of 2002 prohibits terrorism exclusions from insurance policies and written notice from the insurer of any increased premium for such coverage.
Civil Asset Forfeiture Act Becomes Law
This article discusses the enactment of the Civil Asset Forfeiture Act of 2000, and its ramifications for real estate owners and lenders, as well as title insurers. The article also discusses a recent federal court of appeals case of first impression, which permitted the mortgage lender to collect a prepayment premium where the government had seized the mortgaged property and sold it, in connection with a criminal forfeiture proceeding based on the mortgagor's fraud involving the federal Medicare program.
CLOGGING REVISITED (146 Kb -- PDF) - opens in new window
This article discusses the "clogging of the equities" doctrine as applied to traditional real estate transactions, as well as to relatively new forms of transactions such as synthetic leases and mezzanine financing.
Default Interest Rates, Late Charges and Exit Fees: Are They Enforceable? (80 Kb -- PDF) - opens in new window
This article summarizes recent case law regarding the ability of a mortgage lender to charge late charges and default interest, and the permissible amount and scope of such charges. The article further discusses the recent concept of charging a borrower an exit fee (especially in connection with securitized financing), and the enforceability of such a provision. Sample exit fee provisions are attached as exhibits to the article.
Default Interest: Bankruptcy and State Court Decisions
This article discusses recent case law, both bankruptcy and non-bankruptcy, regarding the issue of whether, and to what extent, a secured creditor is entitled to collect contractual default interest and late charges.
Defeasance Provisions in Securitized-Loan Documents (129 Kb -- PDF) - opens in new window
This article discusses the use of defeasance provisions in securitized loan transactions. Topics covered include the following: the definition, nature, and scope of defeasance; benefits to both the lender and borrower; steps that must be taken to comply with the requirements of loan servicers and rating agencies; applicable case law regarding the enforceability of defeasance clauses in mortgage loan documents; "in substance" defeasance; special requirements imposed by REMIC and FASIT investment conduits; structuring considerations; bankruptcy issues; and the use of special consultants and title-company escrow services in such transactions. The article contains, as exhibits, a sample form of prepayment/defeasance provision in a mortgage-loan commitment and sample forms of specialized mortgage prepayment/defeasance provisions for use in securitized financing transactions.
Defective Notarizations: Is There Constructive Notice to Third Parties?
This article discusses recent case law regarding the issue of whether a recorded, but defectively notarized, real estate document is valid and effective, and whether it nonetheless imparts constructive notice to other lienholders and judgment creditors with validly recorded documents. The decisions in this area are often conflicting, and may depend on the construction of applicable state statutes.
DEFECTIVE REAL ESTATE DOCUMENTS: WHAT ARE THE CONSEQUENCES? (310 Kb -- PDF) - opens in new window
exceptions exist, based on the specific facts of the case and applicable state law.
Dressing Up a Naked Option
A discussion and analysis of what interest a secured creditor obtains when it takes a security interest in a "naked" option to purchase real estate; i.e. an option unrelated to any recorded interest, such as a mortgage, that it may otherwise have in the property. The article contains suggestions for legislative solutions.
Due-on-Sale Clauses: Can They Still Be Challenged?: (66 Kb -- PDF) - opens in new window
This article discusses potential challenges to mortgage due-on-sale clauses, even though though there is a statutory federal preemption of any limitation on the exercise of such provisions. The article discusses attempts by "clever" borrowers to challenge the applicability, validity and enforceability of due-on-sale clauses in connection with land contract transfers, the exercise of prepayment provisions, agreements not to "unreasonably withhold" consent to property transfers, changes in entity ownership or control, and borrower bankruptcies. The article includes suggested forms of due-on-sale clauses as exhibits.
Enforceability of Carveouts to Nonrecourse Loans: An Update (65 Kb -- PDF) - opens in new window
This article discusses a recent decision by the federal district court in Illinois, regarding a specific "carveout" from a nonrecourse provision in a commercial loan document. The court ruled that the carveout was valid and enforceable, and summarily rejected the borrower's argument that the carveout constituted a liquidated damages provision or an unenforceable penalty. The article also discusses the types of carveouts commonly inserted in commercial mortgage loan documents and the reasons for their use. The article further discusses the measure of damages for the breach of carveouts, as well as recent case law finding borrower liability under certain tort theories even when there are no carveouts to the nonrecourse provision.
Enforceability of Prepayment-Premium Provisions in Mortgage Loan Documents (521 Kb -- PDF) - opens in new window
An analysis and discussion of recent bankruptcy and non-bankruptcy decisions regarding the validity and enforceability of various types of prepayment provisions in commercial mortgage-loan documents. The article also discusses the "perfect tender in time" rule, the use of "exit fees" in lieu of prepayment premiums, the use of a prepayment-premium provision in the proposed Capital Markets Mortgage, and prepayment/defeasance provisions. The article also includes several forms of yield-maintenance and other prepayment-premium provisions.
Equitable and "Conventional" Subrogation in Illinois (191 Kb -- PDF) - opens in new window
This article describes and analyzes a recent Washington Supreme Court case, Countrywide Home Loans, Inc. v. First Nat. Bank of Steamboat Springs, N.A, 144 P.3d 1224 (Wyo. 2006), which dealt with the issue of whether a refinancing mortgagor must be precluded from equitable subrogation to a first-priority lien if it has actual or constructive notice of a junior lienholder. The court held that that answer was "no," relying on the Restatement (Third) of Property - Mortgages approach, i.e., that actual or constructive knowledge of the intervening lien is irrelevant. The article also discusses other current case law in this area and the distinction that some courts make between "conventional" and "equitable" subrogation.
Expansion of the Illinois Transfer-Tax Statute: An Update
This article summarizes the changes to the Illinois Transfer Tax Law that became effective in June, 2004. Additional transactions that are now subject to a transfer tax include ground leases in excess of 30 years, easements, timber rights, timeshare rights, and “any other type of interest with the right to use or occupy real property.” The amendments also provide that transfers other than by deed or trust document are subject to a transfer tax, including the transfer of a “controlling interest” in a “real estate entity.” The article also discusses the attempt by some Illinois counties and municipalities to impose a transfer tax on similar types of interests.
Exploding and Springing Guarantees : (122 Kb -- PDF) - opens in new window
An analysis of "exploding" and "springing" guarantees, and variations thereof, which provide for liability that only becomes effective, or that terminates, upon the occurence of a specified future event (or events). This article also discusses the enforceability of such documents in the event of the borrower's bankruptcy, and their applicability to conduit and CMBS financing transactions.
Federal Preemption of State Prepayment-Penalty Statutes: The OTS Reverses Itself:
This article discusses the issue of federal preemption of state statutes restricting or prohibiting the charging of prepayment penalties in connection with mortgage loans. The article discusses the applicability of the federal preemption to residential and commercial loans, and the various types of loans that are covered (or exempted). The article also discusses the effect of the Alternative Mortgage Transactions Parity Act on the enforceability of prepayment charges by lenders, and the effect of recent OTS regulations and rulings. The article further discusses the enforceability of prepayment penalties in connection with the lender's acceleration of the loan due to violation of the due-on-sale clause.
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Illinois Appellate Court Upholds Prepayment Ruling Against Lender (41 Kb -- PDF) - opens in new window
This article discusses and analyzes the Illinois appellate court's decision in LaSalle National Bank v. Metropolitan Life Insurance Company, which upheld the trial court's ruling that a disputed mortgage prepayment fee of more than $50 million, as calculated by the lender pursuant to the applicable prepayment provision, was unenforceable and not payable by the borrower. The article also discusses the unique language of the provision, and the dangers inherent in the use of "non-standard" language and the reliance on subjective, as opposed to objective, criteria to determine the amount of the premium.
Illinois Bankruptcy Case Upholds Enforceability of Prepayment Premium
This article summarizes and analyzes an Illinois bankruptcy decision upholding the enforceability of a prepayment premium provision in commercial mortgage-loan documents. The court held that even though the loan had been accelerated the lender could still collect the premium after the property had been sold at a bankruptcy sale, because the prepayment provision provided that the premium would be deemed a "voluntary prepayment" as long as it occurred before a foreclosure sale (as opposed to a bankruptcy sale). The court also awarded the lender its late fee, but refused to allow it to collect default interest. The article also discusses the tendency of some bankruptcy courts (including the court in this case) to subject prepayment premiums to a "liquidated damages" analysis, and the case law regarding the collection of late fees and default interest in bankruptcy.
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Illinois Court Issues Prepayment Decision
This article summarizes the holding of the Illinois trial court in the LaSalle National Bank v. Metropolitan Life Insurance Company, which held that the mortgage lender was not entitled to an escrowed prepayment fee in the amount of $47 million. The prepayment language in the mortgage called for the lender to exercise its "good faith" judgment in selecting a "comparable instrument" to the mortgage as of the day it was entered into in 1987. The court held that the facts in this case indicated that the lender had not, in fact, acted in good faith in selecting the benchmark instrument.
Letters of Credit and ALTA Endorsement 14.2
This article discusses the new ALTA Endorsement 14.2 (Future Advances - Letter of Credit), which is used when the mortgage secures a reimbursement obligation for a letter of credit and contains no exception for advances made after the borrower's bankruptcy. The article urges caution in issuing this endorsement, without the bankruptcy exception, in the situation where the endorsement is requested to insure against loss based on the issuer's failure to realize on its security for its reimbursement rights where the letter of credit secures the tenant's security deposit under a lease. The article analyzes the Ninth Circuit's decision in In re Mayan Networks Corp, which could be construed to limit the issuer's recovery against the tenant's bankruptcy estate.
Loan Guaranties: Advanced Issues (377 Kb -- PDF) - opens in new window
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This article discusses and analyzes, in detail, advanced issues and case law in connection with loan guaranties, including "burn down" and limited/conditional guaranties, "exploding" and "springing" guaranties, and guaranties and fraudulent transfers. The article also contains, as exhibits, various forms of guaranties.
Loan Participations: Recharacterization Issues:
This article discusses the potential recharacterization issues that occur in connection with loans where more than one borrower participates in the financing. It also analyzes the various types of relationships between co-lenders as well as the characterization of participation agreements, and the rights of participating lenders, in connection with borrower bankruptcies.
Mezzanine Financing and Mortgage Securitization Issues (62 Kb -- PDF) - opens in new window
This article summarizes, in outline form, mezzanine financing and securitization issues, including definitions, structural aspects, bankruptcy risks, credit agency requirements, and substantive consolidation.
Michigan Appellate Court Issues Prepayment Decision
This article discusses a recent decision by the Michigan appellate court, which denied a challenge to a mortgage prepayment-penalty clause based on an allegation of an alleged oral promise by the mortgagee not to enforce the penalty provision. The court rejected the mortgagor's claims of negligence and promissory estoppel, and held that Michigan's statute of frauds expressly prohibited any action based on an oral promise. The article also discusses the enactment of "credit agreement" statutes by most states in recent years to deal with the surge of lender liability claims in the late 80s and early 90s.
Michigan Usury Law (Mortgage Loans)
This article summarizes Michigan statutes and case law with respect to usury issues in mortgage loans. The article includes a discussion of applicable Michigan Attorney General opinions, the Michigan "business entity" statute, the Michigan criminal usury statute, and limited statutory exemptions for corporations, partnerships, and limited liability companies.
Mortgage Lender Can 'Force Place' Terrorism Insurance Coverage
This article discusses a New York appellate court decision, BFP Park Co. v. GMAC Commercial Mortgage Corp., which held that a mortgagor was obligated to obtain additional terrorism insurance coverage and that the mortgagee had properly obtained such coverage at the mortgagor's expense. The court held that the "all risk" and "other insurance" provisions in the mortgage were clear and unambiguous, and that such additional insurance was required because it was a risk "commonly insured against" even though not universally insured against in the local commercial market. The article also discusses the importance of careful drafting of insurance provisions in loan documents.
Mortgage Modification Agreements in Difficult Economic Times (167 Kb -- PDF) - opens in new window
This article examines and analyzes the various factors that mortgage lenders, in difficult economic times, should consider when determining whether to modify existing delinquent loans, rather than exercise the legal rights and remedies provided in the loan documents. The article discusses case law in this area, as well as bankruptcy and other concerns, and includes strategies for lenders to employ when negotiating and drafting modification agreements.New Jersey Supreme Court Upholds Enforceability of Late Charges and Default Interest Rate:This article summarizes and analyzes the New Jersey Supreme Court's decision in MetLife Capital Financial Corp. v. Washington Avenue Associates, which reversed the appellate court and held that imposition of a late charge of 5%, and a default interest rate in an amount that was 3% in excess of the contract rate, were reasonable charges and were not invalid penalties.
New Jersey Supreme Court Upholds Enforceability of Late Charges and Default Interest Rate
This article summarizes and analyzes the New Jersey Supreme Court's decision in MetLife Capital Financial Corp. v. Washington Avenue Associates, which reversed the appellate court and held that imposition of a late charge of 5%, and a default interest rate in an amount that was 3% in excess of the contract rate, were reasonable charges and were not invalid penalties.
Options and Related Rights With Respect to Real Estate: A Primer (229 Kb -- PDF) - opens in new window
This article describes the current creditors' rights exclusion in the ALTA lender's title insurance policy. It then discusses and analyzes the circumstances and conditions for removal of the exclusion, and applicable case law regarding whether removal of the exclusion implies coverage for creditors' rights issues. It also discusses the relative concerns and expectations of the insurer and insured, and the availability and scope of affirmative title coverage for creditors' rights issues.
Options and Related Rights With Respect to Real Estate: Carveouts for Specific Transactions (73 Kb -- PDF) - opens in new window
This article discusses the desirability and effectiveness of language in real-estate documents carving out and excluding certain types of transactions where a party has granted an option, right of first refusal, or similar rights. The article reviews and analyzes the existing case law in this area, and suggests strategies for eliminating (or at least minimizing) the problems that may occur.
OTS Rule on Late Charges and Prepayment Penalties Upheld by D.C. Appellate Court
This article discusses a recent decision by the U.S. Court of Appeals for the District of Columbia Circuit, which held that the Office of Thrift Supervision, which regulates lenders other than commercial banks and credit unions, did not exceed its authority in issuing a rule that federal regulations regarding late charges and prepayment penalties were inapplicable to state-chartered housing creditors and were not preempted by such federal regulations, thereby requiring such creditors to comply with state laws regarding these charges. The article also discusses other recent case law in this area.
Participating Mortgages and Equity Kickers - Legal Issues: (465 Kb -- PDF) - opens in new window
This manual, which was prepared for the Annual Winter Conference of the Real Property Law Section of the Michigan Bar Association in 1990, contains an exhaustive analysis of the legal and drafting issues involved in participating and "equity kicker" commercial mortgage loans. Included are sample forms of title endorsements for these types of loan transactions, as well as sample loan commitment forms.
Perfecting and Enforcing a Security Interest in an Option to Purchase Real Estate
This article discusses whether, and under what circumstances, a security interest in an option to purchase real estate constitutes an interest in personal property (in which event the applicable Uniform Commercial Code perfection provisions, as modified by the recent revisions to Article 9, would apply) or real estate (in which event the interestwould be need to be properly recorded in the applicable real estate records). The article aslo discusses the impact of the recent revision to Article 9 of the UCC with respect to this issue, as well as applicable bankruptcy court descisions. The article further contains suggestions for lenders on how to protect and properly perfect security interests in such options to purchase.
Pre-Petition Distribution of Cash by a Mortgagor: A Fraudulent Transfer?
This article discusses a decision by the Second Circuit Court of Appeals, which held that a borrower's distribution of cash to its partners while real estate taxes were unpaid constituted a fraudulent transfer under the Uniform Fraudulent Conveyance Act in effect in New York. The article also discusses and analyzes federal and state case law regarding the issue of whether the failure to pay taxes, or the diversion of rental proceeds from the property, constitutes actionable waste notwithstanding the nonrecourse nature of the loan.
Prepayment/Exit Fees: The Importance of Clarity
This article discusses one of the few cases that have decided the validity and enforceability of an "exit fee," whicn is a fee exacted by a lender in lieu of or in addition to a prepayment premium when the loan is paid by the borrower before its maturity date. The article analyzes a U.S. 2005 District Court case from New York, Anthracite Capital, Inc. v. MP-555 West Mezzanine, LLC, which held that the exit fee provision, as set forth in the mezzanine-financing loan agreement executed by the borrower, was not enforceable because it only applied if actual consideration was paid to the borrower in connection with a sale of the property. In this case, the transfer was in connection with an internal reorganization and restructure of the borrower's businesss operations and did not involve a cash sale to a third party. The article also includes a discussion of cases involving the payment of exit fees in general, as well as case law construing the scope of the language in such provisions and whether payment of the prepayment/exit fee was triggered by a particular transaction.
Purchase-Money Mortgages: Lien Priority (95 Kb -- PDF) - opens in new window
This article discusses the case law that supports the strong public policy protecting seller/purchase-money mortgage lenders with respect to subsequent construction-loan mortgages, whether or not the seller/purchase-money mortgage lender has subordinated its loan to the third-party mortgage. In certain instances, such as states with “race-notice” recording statutes, the lien of the purchase-money mortgage may be prior to the lien of the third-party lender even where the third-party lender records its mortgage first. The article also discusses the risks of modifying third-party mortgage loans when a subordination agreement entered into by the respective lenders does not specifically contemplate such modifications or the seller/purchase-money lender does not consent. The article also contains drafting tips to help realize the parties’ expectations.
Recharacterization Issues in Participating and 'Equity Kicker' Loans: (363 Kb -- PDF) - opens in new window
This article discusses the advantages and disadvantages to mortgagors and mortgagees of "participating" loans, i.e., loans that entitle the mortgagee to contingent interest and/or shared appreciation (or other "equity kicker"). The article also discusses and analyzes recharacterization risks in connection with contingent-interest and shared-appreciation mortgages, including disguised equity interests, control and lender liability, tax issues, environmental issues, usury, unconscionablilty, equitable subordination, clogging the equity, and Uniform Commercial Code issues. The article also discusses special title insurance coverages and endorsements available for this type of financing.
Recharacterization Issues in Participating Loans (121 Kb -- PDF) - opens in new window
This article discusses the relationship between the lead lender and the participating lender or lenders in a participating loan, which a "lead" or "agent" bank will often agree with another bank or financial institution, or several banks or financial institutions, to "participate" the loan, i.e., to transfer an interest in a portion of the mortgage loan and the underlying debt obligation either prior to the closing of the loan or after the loan has closed. The article discusses the characterization of a participation interest and how it might affect the ability of the lead lender, or a participant, to deal with the collateral when the loan is in fact secured by an interest in real property. The article further discusses the characterization of participation agreements in bankruptcy as well as Uniform Commercial Code issues that arise in connection with participating loans.
Recharacterization Issues in Real Estate Transactions (61 Kb -- PDF) - opens in new window
A detailed discussion and analysis of the risk of recharacterization by a court of certain real estate transactions, including contingent-interest and shared-appreciation loans, convertible mortgages, sale-leaseback transactions, synthetic-lease transactions, deeds in lieu of foreclosure, loan participations, and mezzanine financing structures. Particular attention is given to recharacterization risks, including equitable subordination, that arise when the real property is the subject of bankruptcy proceedings. The article also discusses the role of title insurance in alleviating recharacterization risks, and contains sample forms of endorsements.
Recharacterization Issues in Real Estate Transactions - Outline (61 Kb -- PDF) - opens in new window
This article analyzes the types of real estate transactions that are subject to recharacterization by a court, including bankruptcy courts and tax courts. These transactions include sale-leasebacks, deeds in escrow, synthetic leases, participation loans, “equity-kicker” loans, lease-leasebacks, deeds-in-lieu and deeds-in-escrow, mezzanine loans, and commercial mortgages.
Recharacterization Issues in Sale-Leaseback Transactions (72 Kb -- PDF) - opens in new window
This article analyzes the types of real estate transactions that are subject to recharacterization by a court, including bankruptcy courts and tax courts. These transactions include sale-leasebacks, deeds in escrow, synthetic leases, participation loans, “equity-kicker” loans, lease-leasebacks, deeds-in-lieu and deeds-in-escrow, mezzanine loans, and commercial mortgages.
Restrictions on the Use of Wraparound Mortgages under Michigan Law
This article defines and describes "wraparound mortgages," and discusses two Michigan cases that dealt with the issue of whether federal law preempted application of the State's usury and consumer-protections laws to such mortgages.
Rights of Remote Grantee Against Original Grantor in Illinois
This article discusses applicable Illinois case law regarding the issue of whether, and under what circumstances, a remote grantee has rights back against the original grantor when the remote grantee receives a quitclaim deed from an intermediate grantor, and the original grantor conveyed by warranty deed.
Sale-Leasebacks: Things May Not Be What They Seem (81 Kb -- PDF) - opens in new window
This article discusses the special risks involved in a sale-leaseback transaction; i.e., if it is not carefully structured and documented, it may be subject to subsequent recharacterization by a court as an equitable mortgage, or as a joint venture. This is especially true if a bankruptcy proceeding is filed by or against the seller-lessee, and the seller-lessee, as debtor in possession (or the bankruptcy trustee) claims that the transaction does not constitute a “true” lease. This article examines the relevant bankruptcy law and the factors that bankruptcy courts consider when determining whether to recharacterize a transaction initially designated by the parties as a sale-leaseback. This article also will suggest certain preventive and protective measures that may be utilized by the parties to a sale-leaseback transaction to minimize the risk of subsequent recharacterization.
SNDAs: Obligation to Cure Landlord Defaults
This article discusses a contentious issue in the negotiation of subordination, nondisturbance and attornment agreements ("SNDAs") in connection with mortgage-financing transactions: the obligation of a foreclosing mortgage lender to cure landlord defaults existing and continuing at the time of transfer of possession and title. The article contains a sample negotiated provision that will hopefully address the concerns of both the lender and the tenant.
Special and Limited Warranty Deeds (42 Kb -- PDF) - opens in new window
This article discusses the nature and scope of special and limited warranty deeds, and the use of such deeds in place of quitclaim and warranty deeds. It also discusses recent case law and legal commentary regarding these types of deeds, and contains a form of special/limited warranty deed as an exhibit.
Tenant Letters of Credit in Bankruptcy: Retention of Proceeds in Excess of Statutory Cap (69 Kb -- PDF) - opens in new window
This article summarizes the decision of the Fifth Circuit Court of Appeals in In re Stonebridge Technologies, Inc. In this case, the court reversed the holdings of the bankruptcy court and district court, and held that the landlord's retention of letter-of-credit proceeds (as part of the security deposit for the tenant-debtor’s lease obligations) in excess of the bankruptcy cap on a landlord's damages under sec. 502(b)(6) of the Bankruptcy Code was permissible, because the sec. 506(b)(6) cap was not triggered where the landlord did not file a claim in tenant-debtor's bankruptcy case. The article also discusses other case law in this area.
Tennessee Deed of Trust is Valid Even Though Acknowledgment is Defective
This article discusses the issue of defective acknowledgments in recorded documents, and whether or not such documents impart notice to third parties with properly recorded documents that have no defects. In particular, the article discusses a recent Tennessee case, In re Hickman, in which the bankruptcy court held that, based on an applicable Tennessee statute, omission of the debtors' names in the acknowledgment of the deed of trust did not make the lien avoidable by the bankruptcy trustee.
Terrorism Insurance: Its Effect on Real-Estate Financing Transactions (53 Kb -- PDF) - opens in new window
This article discusses the necessity, availability, cost, and scope of terrorism insurance for mortgage-financing transactions in the wake of the terrorist attacks on September 11, 2001. It also discusses the reaction of rating agencies, attempted federal governmental efforts to address the issue, and the effect of new or more stringent insurance requirements on the CMBS market and general mortgage transactions.
The Mezzanine Financing Endorsement (24 Kb -- PDF) - opens in new window
This article describes the coverage available (in certain jurisdictions) to mezzanine lenders (who lend to equity holders in the entity that has title to the property and secure the loan with pledges of the equity interests) under a special mezzanine financing endorsement which, subject to certain conditions and qualifications, provides "Fairway," non-imputation, and additional-insured coverage to the mezzanine lender. Sample forms of such endorsements are attached to the article.
The Use of Land Trusts and Business Trusts in Real Estate Transactions (179 Kb -- PDF) - opens in new window
This article contains an in-depth discussion of the use of land trusts and business trusts in real estate transactions, including the creation and formation of such entities, bankruptcy issues, and proper parties in litigation.
Title and UCC Issues in Connection with Sales and Assignments of Defaulted CMBS Loans (103 Kb -- PDF) - opens in new window
This article discusses and analyzes the issues that title insurers face when dealing with defaulted CMBS loans, including the situation where such loans (whether individual or packaged) are in default and are sold or assigned to a subsidiary, affiliate, a newly created special purpose entity, or to an independent third party. Both title and UCC issues are addressed.
Title Insurance for Mezzanine Financing Transactions (369 Kb -- PDF) - opens in new window
This article discusses and analyzes the title insurance coverages and endorsements available to mezzanine lenders, including the new ALTA Endorsement 16 (Mezzanine Financing), for issuance in connection with the ALTA Owner's Policy. It also discusses the availability and coverage of UCC insurance that insures the attachment, perfection, and priority of the mezzanine lender's security interest in the pledge of the ownership interests in the borrowing entity. The article also contains several sample documents, including those necessary to "opt in" to Article 8 of the UCC and thereby obtain "protected purchaser" status.
Use of Special Purpose Entities in Real-Estate Financing Transactions (47 Kb -- PDF) - opens in new window
This article discusses lender and rating-agency requirements in connection with the use of special purpose entities ("SPEs") as borrowers in real-estate financing transactions. It also discusses the use of trusts and limited liability companies as SPEs, including applicable case law and bankruptcy issues. It further discusses and analyzes the proposed new accounting rules that affect the use of SPEs in connection with synthetic-lease transactions.

Real Estate Bankruptcies

Real Estate BankruptciesThe enforceability of attorneys' fees provisions in nonrecourse loans; tenants' and landlords' rights in bankruptcy; bankruptcy "facts"; bankruptcy reorganization under Chapter 11; the rights of brokers to a commission on a resale if a bankruptcy sale is "free and clear of all interests"; the Bankruptcy Code transfer-tax exemption; rights of bankruptcy trustee as against mistaken mortgage releases; business trusts and whether they are "bankruptcy-proof; "reasonably equivalent value issues; the avoidance of payment of interest by filing bankruptcy; the enforceability of "due-on-sale" clauses; whether an equitable subordination claim can "trump" a state foreclosure proceeding; the effect of the doctrine of "equitable subrogation"; the enforceability of nonrecourse carveouts in bankruptcy proceedings; the enforceability of letters of credit; the enforceability of automatic waivers of stay; guaranties and fraudulent transfers; the provisions of the 2005 Bankruptcy Act that affect real estate; the "new value" exception the "absolute priority rule"; single-asset real estate bankruptcies.
“Reasonably Equivalent Value,” Forced Sales, and the Application of §§ 547 and 548 of the Bankruptcy Code (80 Kb -- PDF) - opens in new window
This article discusses the “reasonably equivalent value” and it application under sections 547 and 548 of the Bankruptcy Code in light of the U.S. Supreme Court’s 1994 decision BFP v. Resolution Trust Corp., which held that reasonably equivalent value, in the case of a mortgage foreclosure, is the price received at a regularly conducted, non-collusive foreclosure sale. In particular, this discusses and analyzes a recent Texas bankruptcy decision, Villarreal v. Showalter (In re Villarreal), which held that the BFP decision did not preclude the court from voiding a pre-bankruptcy sale of the debtor’s property as a preferential transfer under sec. 547 of the Bankruptcy Code.
Attorneys Fees Nonrecourse Loans (36 Kb -- PDF) - opens in new window
This article discusses and analyzes a California appellate court decision holding that the lender could not recover its attorneys’ fees incurred in litigation with the debtor. Even though the court had found that the borrower partnership and its general and managing partners were guilty of the tort of bad-faith waste for failure to pay real estate taxes while the nonrecourse mortgage was delinquent, the lender was not entitled to attorneys' fees under the contractual language in the loan documents. The article also contains a discussion and analysis of bankruptcy court rulings on the issue of whether, and under what circumstances, a lender may recover attorneys’ fees incurred pursuant to a contractual entitlement to such fees, when the debtor files a bankruptcy proceeding.
Bankruptcy Sale 'Free and Clear of All Interests' Terminates Contractual Right of Broker to Receive Commission On Resale
This article discusses a California Appellate Court decision, C.H.E.G., Inc. v. Millenium Bank, which held that a bank lender that purchased the secured property at a bankruptcy sale "free and clear" of all liens, interests, or encumbrances, and subsequently sold the property to the lessee of the bankrupt lessee that occupied the property, did not thereby assume an obligation to pay a commission to a third-party broker in accordance with a provision in the lease providing for such commission upon a sale to the lessee. The article also analyzes the statutory and case law with respect to the issue of what rights and obligations of the landlord survive when a third party purchases property through a bankruptcy proceeding "free and clear" of liens, and the issue of what obligations of a bankrupt lessor survive when the lessor files bankruptcy and the lessee elects not to reject the lease.
Bankruptcy Sale of Debtors Property Free and Clear Terminates Lease (68 Kb -- PDF) - opens in new window
This article discusses a case of first impression by the Ninth Circuit Federal Court of Appeals, Precision Industries, Inc. v. Qualitech, which held that the sale of the lessor-debtor's property "free and clear" of all liens, claims, encumbrances pursuant to section 363(f) of the Bankruptcy Code terminated the lease in effect on the property notwithstanding the provisions of section 365(h) of the Bankruptcy Code, which permits a lessee to retain its possessory interest in the leased property if the lessor-debtor rejects the lease. The article also discusses the background of these statutory provisions.
Bankruptcy Trustee Prevails Against Mistaken Mortgage Release
This article discusses a Kansas bankruptcy court decision, In re Gilbert, which upheld the right of the bankruptcy trustee, under Section 544(a) of the Bankruptcy Code, to avoid a mortgage lien on real property owned by the Chapter 7 debtors. The bank lender had mistakenly recorded a release of the mortgage. The court ruled that the knowledge of the mortgagors regarding the mistaken release could not be imputed to the trustee, and that the bank lender was not entitled to reinstatement of the mortgage under equitable principles.
Bankruptcy: Reorganization Under Chapter 11 (404 Kb -- PDF) - opens in new window
This article provides a comprehensive overview of real-estate bankruptcy reorganizations under Chapter 11 of the Bankruptcy Code. The article focuses on the remedies, options, and strategies of secured mortgage lenders, including cash-collateral issues, "cramdown," relief from the automatic st¡ay, valuation, voting and classification, confirmation, purchasing claims, prepackaged plans, and debtor-in-possession financing.
BFP and 'Reasonably Equivalent Value': Are There Any Loose Ends?
This article discusses the application of the 1994 U.S. Supreme Court's holding in BFP v. Resolution Trust Corp. (which held that a regularly conducted, non-collusive foreclosure sale under applicable state law constituted "reasonably equivalent value" for the purpose of determining fraudulent transfers under section 548 of the Bankruptcy Code) to other "forced sales," such as non-judicial (or "strict") foreclosures and tax sales, and whether it applies to "voluntary" transfers such as deeds in lieu of foreclosure. The article also discusses the conflicting case law in this area, as well as the applicability of state fraudulent conveyance and fraudulent transfer statutes.
Business Trusts: What are They (and Are They Bankruptcy Proof)?
This article describes the use of business trusts as special purpose (or "bankruptcy remote") entities to minimize bankruptcy risk in commercial real estate transactions. The article discusses the definition and creation of these (and similar) types of trusts, and analyzes case law that indicates that - under certain circumstances - such entities may even be "bankruptcy proof."
Can a Bankruptcy Filing Wipe Out Default Interest? (75 Kb -- PDF) - opens in new window
This article discusses the decision of the Ninth Circuit Court of Appeals in Platinum Capital, Inc. v. Sylmar Plaza, which upheld the confirmation of the debtor's Chapter 11 bankruptcy reorganization plan even though the sole purpose of the plan was to avoid paying approximately $1 million of default interest due on a mortgage loan form the debtors to a successor of the original mortgagee. The article contains a thorough discussion and analysis of the applicable Bankruptcy Code provisions and related case law in this area
Can an Equitable Subordination Claim 'Trump' a State Foreclosure Proceeding?
A summary and analysis of a recent Vermont bankruptcy decision which held that an equitable subordination claim, filed by the debtor-mortgagor in connection with its Chapter 11 bankruptcy filing, "trumped" a pending state foreclosure action previously filed by the mortgagee and made the entire matter a "core" proceeding to be decided solely by the bankruptcy court.
DePrizio: Is the Controversy Finally Over? (48 Kb -- PDF) - opens in new window
The Bankruptcy Reform Act of 1994 amended § 550 of the Bankruptcy Code. The amendment to § 550 was intended to effectively overrule the infamous DePrizio decision by stating that payments to a noninsider lender may only be recovered if made during the ninety-day period following such payments. But this did not stop DePrizio challenges until enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This article discusses the DePrizio issue and the legislation that finally resolved the questions regarding this issue.
Due-on-Sale Clauses and Chapter 13: Can a Non-Assuming Grantee Reinstate the Mortgage?
This article discusses the bankruptcy court's holding in In re Trapp. The court found that even though no privity of contract existed between the mortgage lender and the bankrupt debtor (the original borrower had sold the property to the debtor subject to the mortgage, in violation of the due-on-sale clause in the mortgage), the property was still part of the bankruptcy estate and the debtor had the power to decelerate the loan payments and cure the default through a Chapter 13 plan.
Effect of Bankruptcy Court Rejection of Executory Contracts and Leases on Rights of Third Parties
This article summarizes recent case law regarding the issue of whether the rejection in bankruptcy of a lease or executory contract automatically terminates third party interests, such as a leasehold mortgage, or permits such nondebtor interests to continue.
Effect of Bankruptcy on Renewal of Letter of Credit
This article discusses a Second Circuit Court of Appeals decision, New England Dairies, Inc. v. Diary Mart Convenience Stores, which held that the beneficiary of a letter of credit, issued as a pre-judgment remedy in an action commenced prior to the debtor's bankruptcy filing, was not a secured creditor under the Bankruptcy Code and was not entitled to receive adequate protection of its interest in the form of an order compelling the debtor to renew or replace the letter of credit before it expired. The article also contains suggested strategies to be implemented by creditors to avoid a similar result.
Enforceability of Intercreditor Agreements in Bankruptcy (45 Kb -- PDF) - opens in new window
This article analyzes the Illinois bankruptcy court's holding in In re 203 North LaSalle Street Partnership, in connection with the issue of whether a subordination agreement entered into by a junior mortgagee is enforceable in the mortgagor's Chapter 11 bankruptcy proceeding. The court held that the subordination was effective as to the entire indebtedness, even though the first mortgage lender's loan was nonrecourse and it was undersecured by a large amount. However, the court refused to permit the senior lender to vote the claim of the junior lender, even though the subordination agreement so provided. The article also examines case law in this area from other jurisdictions.
Enforceability of Nonrecourse Carveouts in Bankruptcy Proceedings (27 Kb -- PDF) - opens in new window
Enforceability of Nonrecourse Carveouts in Bankruptcy Proceedings
This article discusses some fairly recent bankruptcy cases that have permitted the creditor to enforce certain “carveouts” to nonrecourse provisions in mortgage loans, which permit the lender to obtain personal liability against the borrower if there is a bankruptcy proceeding filed by or against the borrower, and under what circumstances such provisions are enforceable.
Enforceability of Waiver of Automatic Stay in Pre-Petition Forbearance Agreement
This article discusses a 2005 Vermont bankruptcy decision, In In re Frye. In this case, the court ruled that although an automatic-relief-from-stay provision in a pre-petition forbearance agreement was not per se enforceable, the lender was entitled to enforce the agreement unless the debtor-borrower could demonstrate sufficient equity in property in excess of mortgage debt, that it was likely that it could successfully reorganize, or that sufficient prejudice to other creditors outweighed the lender's request for relief. The article also discusses other case law in this area, and the factors that courts consider when deciding whether to uphold the validity of such provisions.
Equitable Subordination in Bankruptcy: An Analysis of In re Yellowstone (85 Kb -- PDF) - opens in new window
This article discusses the doctrine of equitable subordination under Sec. 510 of the Bankruptcy Code, and discusses in particular a recent Montana bankruptcy case, In re Yellowstone Mountain Club, LLC, where the court ruled that the lender’s actions warranted subordination of its secured claim to all other claims (secured and unsecured) in the borrower-debtor’s Chapter 11 bankruptcy proceeding.
Equitable Subordination of Claims in Bankruptcy
This article discusses the concept of equitable subordination, which is set forth in Section 510(c) of the Bankruptcy Code. The article analyzes the case law that has developed in this area, which defines the scope and substance of this remedy.
Foreclosures and Bankruptcies: Are There 'Surplus' Proceeds?
This article discusses a Texas Bankruptcy case, In re Home and Hearth Piano Parkway, L.P., which held that when the bankruptcy court grants a mortgage lender relief from the automatic stay, the lender is entitled to credit bid the amount permitted under its mortgage and applicable state law, and not bound by any Bankruptcy Code limitations on the amount of the lender's claim; therefore there is no "surplus" due to the borrower-debtor if the amount the lender bids at the foreclosure sale exceeds the amount of its bankruptcy claim. The article also discusses the treatment of a lender's secured claim in bankruptcy proceedings, the importance of obtaining an interest in the rental income, and strategies involved in the borrower's and lender's valuation of the mortgaged property.
Guaranties and Fraudulent Transfers (473 Kb -- PDF) - opens in new window
This article discusses the state and federal doctrines of fraudulent conveyance, and the federal doctrine of preferential transfer, as they relate to various forms of mortgage loan guaranties. The article then discusses strategies to minimize risk, and contains several form documents to help achieve this goal.
Holdover Tenancies and the Bankruptcy Code
This article discusses a recent Illinois bankruptcy decision, In re Pena, which held that the debtor-tenant had the right to assume a holdover tenancy interest that existed on the date of his Chapter 13 bankruptcy petition but that the interest expired on the one-year anniversary of the lease's expiration date. The article analyzes the reasons for the court's holding, and suggests language to insert in commercial leases to address this issue.
Is a Defective Mortgage Protected From a Preference Claim?
This article discusses the holding of the U.S. Seventh Circuit Court of Appeals in In re Jones. The court in Jones permitted the bankruptcy trustee to recover, as a preferential transfer, the proceeds from the Ohio foreclosure sale of the debtors' primary residence. The article further describes other bankruptcy decisions that have held that a bankruptcy proceeding can "trump" a state foreclosure action, and the effect of such decisions on the finality of state foreclosure proceedings.
Land Contracts: Clogging and Bankruptcy Issues
This article discusses the "clogging the equity" doctrine as it relates to land contract forfeiture proceedings. The article analyzes a recent unreported Michigan appellate decision that held that a land-contract forfeiture judgment impermissibly clogged the borrower's right of redemption. The article further examines the issue of whether, when a bankruptcy proceeding is filed by or against a land contract vendor or vendee after execution of the land contract, the land contract will be construed as an executory contract under the Bankruptcy Code that can be assumed, assigned or rejected by the trustee or debtor-in-possession.
Lease Rejection in Bankruptcy: Termination or Mere Breach?
This article discusses the issue of whether a termination of a lease in bankruptcy by the debtor-landlord causes the lease to be terminated (along with all the tenant's rights thereunder except for the right of possession) or whether there is merely a deemed beach of the lease, with third-party rights (such as subleases and options to purchase) remaining in effect. The article further discusses the conflicting bankruptcy cases on this issue, the effect of a debtor lessee's rejection of the lease on third-party rights, and whether an option right or right of first refusal is an executory contract requiring assumption by the debtor-optionee.
Limited Liability Companies: Bankruptcy Issues
This article discusses the treatment of limited liability companies ("LLCs") under the Bankruptcy Code, including single-member LLCs, the effect of a filing by a member of an LLC, lender concerns in structuring LLC borrowing entities, authority to file on behalf of an LLC, the efficacy of LLCs as asset-protection vehicles, and the feasibility of a lender becoming an LLC member. The article also analyzes the applicable case law in these areas.
New Bankruptcy Act: Provisions Affecting Real Estate (108 Kb -- PDF) - opens in new window
This article summarizes the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which was enacted into law on April 20, 2005 and applies to all bankruptcy cases filed on or after October 17, 2005 (with limited exceptions as to certain provisions). Approximately half of the Act's provisions deal with business, not consumers, and at least 21 provisions relate in some manner to real estate. This article summarizes the revised provisions of the Bankruptcy Code that should have a major impact on bankruptcy estates involving real property.
New Value Exception Survives in Seventh Circuit
This article discusses the recent decision of the U.S. Seventh Circuit Court of Appeals that affirmed the confirmation plan of a single-asset real estate entity over the mortgage lender's objection, and affirmed the continuing validity of the "new value exception" to the Bankruptcy Code's "absolute priority rule.
New York Bankruptcy Court Exempts Pre-Confirmation Sale of Assets from Transfer Tax
This article discusses a New York bankruptcy court decision holding that the sale of real estate assets from a bankruptcy estate prior to plan confirmation qualifies for the exemption from transfer taxes under sec. 1146(c) of the Bankruptcy Code, where the sale is integral to a Chapter 11 reorganization plan that is subsequently confirmed. The article also compares this decision with other case law in this area.
Ninth Circuit B.A.P. Restricts Bankruptcy “Mootness” Doctrine (58 Kb -- PDF) - opens in new window
In a surprising decision by the Ninth Circuit BAP, In re PW, LLC, the court held that, notwithstanding the junior lienholder’s failure to obtain a stay pending appeal of the bankruptcy court’s order approving a sale of the estate property free and clear of the junior lien on the property, § 363(f) of the Bankruptcy Code did not permit the senior secured creditor to credit-bid its debt and purchase the estate property free and clear of the junior lien based on the “mootness” doctrine. This article analyzes the court’s holding in this case, and discusses the implications of this ruling.
Options to Purchase Real Estate: Executory Contracts?
This article discusses and analyzes the issue of whether an option to purchase real estate contained in a lease or a mortgage is an executory contract, which can be either assumed or rejected by the borrower if it subsequently files for bankruptcy. The article also discusses title-insurance-coverage issues in connection with executory contracts.
Post-Petition Transfers: The McConville Issue (21 Kb -- PDF) - opens in new window
This article summarizes and analyzes the holding of the Ninth Circuit Court of Appeals in In re McConville. In this case, the lenders made a loan to the debtor and recorded a deed of trust post-petition without knowledge of the mortgagor/debtor's bankruptcy filing. The Ninth Circuit held that the creation of a mortgage lien does not transfer property for purposes of section 549 of the Bankruptcy Code; however, the court found that the debtor violated section 364(c) (2) by incurring secured debt without prior court authorization and, based on the equities of the case, determined that the lenders should get back the amount of money they loaned on the property and gave them a lien on the sale proceeds. The article also discusses current legislative attempts to amend the Bankruptcy Code to provide that mortgages are in fact "transfers" under the Bankruptcy Code, and do not violate the automatic stay provisions of the Bankruptcy Code, where notice of an undisclosed bankruptcy petition in another jurisdiction is not a matter of public record in that jurisdiction.
Pre-Petition Distribution of Cash by a Mortgagor: A Fraudulent Conveyance?
This article discusses a federal court of appeals ruling which held that the failure of the debtor to pay taxes from pre-petition property income, while making cash distributions to the debtor's partners, constituted actionable waste and was a fraudulent transfer under state law, enabling the secured creditor to recover such amounts notwithstanding that the loan was non-recourse. The article also discusses other cases that have held that the failure to pay taxes constitutes waste.
Prepayment Premiums: A Bankruptcy Court Analysis of Reasonableness and Liquidated Damages
This article discusses and analyzes the issue of whether a prepayment premium provision in a commercial mortgage will be construed as "reasonable" under Section 506(b) of the Bankruptcy Code. The article also discusses recent case law in this area, and focuses on whether or not the courts will - or should - employ a liquidated-damages analysis in determining whether the charge is reasonable. The article also summarizes recent bankruptcy decisions regarding the issue of whether a prepayment charge constitutes unmatured interest under Section 502(b)(2) of the Bankruptcy Code.
Recent Developments in 'New Value' and Single Asset Real Estate Cases
An analysis of current conflict in case law concerning the "new value" exception to the absolute priority rule in connection with single-asset real estate bankruptcy cases. The article contains a discussion and review of recently proposed federal legislation designed to resolve the conflict in existing case law in this area.
Right of First Refusal Held Enforceable in Bankruptcy
This article discusses and analyzes a North Carolina bankruptcy court decision, In re E-Z Serve Convenience Stores, Inc., which held that, based on the facts and circumstances of the case, the landlord's right of first refusal to purchase the buildings and permanent improvements constructed on the leased land by the debtor-tenant was enforceable and would not be excised. The article includes a "drafting tip," and a discussion of the "chilling effect" of an option or right of first refusal on the ability of the bankruptcy trustee to attract other offers for the property.
Single-Asset Real Estate Bankruptcies: Purchasing Claims to Block Confirmation and Avoid Cramdown
This article discusses the requirements for the acceptance and approval of a Chapter 11 plan of reorganization, and analyzes the "cramdown" risks faced by the secured creditor in a single-asset real estate bankruptcy. It also examines the utilization by the secured mortgage lender of the strategy of purchasing the unsecured bankruptcy claims of third parties against the debtor, in order to avoid cramdown or block confirmation of the debtor's proposed plan.
Single-Asset Real Estate Bankruptcies: Selected Issues
This article summarizes current developments in Chapter 11 single-asset real estate bankruptcy cases.
Structuring the Transfer Through a Prepackaged Bankruptcy: How and Why
This article discusses the benefits, and analyzes the structure of, a prepackaged bankruptcy (or out-of-court restructuring) plan negotiated by the lender with the borrower and key creditors before, and submitted to the bankruptcy court for approval simultaneously with, a voluntary Chapter 11 filing by the debtor.
Survivial of the New Value Exception (80 Kb -- PDF) - opens in new window
This is an updated version of material written by Judith Greenstone Miller and John C. Murray, and published as U.S. Supreme Court Rules on "New Value," or Does It?, which first appeared in the Michigan Real Property Review 67 (Summer 1999), and thereafter published as The "New Value" Exception: Myth or Reality After Bank of America National Trust & Savings Association v. 203 N. LaSalle Street Partnership?, 104 Com. L.J. 147 (Summer 1999).
Termination Damages Under Swap Agreements Held Not to be 'Unmatured Interest' Under Bankruptcy Code
Termination Damages Under Swap Agreements Held Not to be 'Unmatured Interest' Under Bankruptcy Code.
The "New Value" Exception: Myth or Reality? (60 Kb -- PDF) - opens in new window
This article discusses and analyzes the U.S. Supreme Court's recent ruling in the 203 N. LaSalle Street Partnership case. The Supreme Court held that the debtor, by retaining the exclusive opportunity to propose a "new value" single-asset real estate Chapter 11 bankruptcy plan, had violated the Bankruptcy Code's "absolute priority" rule. The high court remanded the case for further proceedings. This article also speculates on the impact of this case on future single-asset real estate bankruptcy bankruptcy filings.
The Bankruptcy Mootness Doctrine: What is the Effect of the Ninth Circuit’s Holding in the PW Decision? (108 Kb -- PDF) - opens in new window
This article analyzes and discusses a Ninth Circuit Bankruptcy Appellate Court Panel ruling, Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), which held, in a matter of first impression, that notwithstanding the junior leinholder’s failure to obtain a stay pending appeal of the bankruptcy court’s order approving a sale of the estate property free and clear of the junior lien, § 363(f) of the Bankruptcy Code did not permit the senior secured creditor to credit-bid its debt and purchase the estate property free and clear of the junior lien based on the “mootness” doctrine. The article also discusses subsequent case law on this issue and title insurers’ response to this ruling, as well as a sample Bankruptcy Order Authorizing Trustee to Sell Free and Clear of Liens.
The Bankruptcy Transfer-Tax Exemption and Transfers to Non-Debtor Parties
This article discusses a New York bankruptcy court decision, which held that where a transfer transaction is necessary for the consummation of a confirmed Chapter 11 bankruptcy plan, the exemption from stamp or similar taxes contained in sec. 1146 (c) of the Bankruptcy Code applies, even as to third-party transactions involving non-estate property. The article also contains a discussion of related bankruptcy law in this area.
The Doctrine of Equitable Subrogation: Aames Capital Corp. v. Interstate Bank of Oak Forest
This article discusses and analyzes a recent Illinois appellate court decision, which permitted a mortgage to be subrogated in priority to a previous mortgage that had been paid off from proceeds of the new mortgage. The article compares this decision with a recent Illinois bankruptcy decision that reached a contradictory result.
The New Bankruptcy Act: Provisions Affecting Real Estate (52 Kb -- PDF) - opens in new window
This article analyzes and comments on selected provisions of the Bankruptcy Prevention and Consumer Protection Act of 2005 that significantly affect real estate transactions, including the following: single-asset real estate; preferential transfers and fraudulent conveyances; assumptions of leases and contracts; priority for administrative expenses; post-petition transfers; and exclusivity periods for filing Chapter 11 reorganization plans.
Transfer-Tax Considerations in Real Estate Bankruptcy Proceedings (4 Mb -- PDF) - opens in new window
This article discusses the section 1146(c) Bankruptcy Code exemption and its impact on the taxes associated with property being transferred by a bankrupt debtor. Topics covered include the scope of the exemption, the issue of pre-confirmation v. post-confirmation transfers, constitutional challenges to the section 1146(c) exemption, and practical considerations (including escrow arrangements for disputed taxes). The article also includes exhibits setting forth sample provisions for insertion in bankruptcy plans and sale orders.
U.S. Supreme Court Rules on 'New Value,' or Does It?
This article discusses and analyzes the U.S. Supreme Court's recent ruling in the 203 N. LaSalle Street Partnership case. The Supreme Court held that the debtor, by retaining the exclusive opportunity to propose a "new value" single-asset real estate Chapter 11 bankruptcy plan, had violated the Bankruptcy Code's "absolute priority" rule. The high court remanded the case for further proceedings. This article also speculates on the impact of this case on future single-asset real estate bankruptcy bankruptcy filings.
Waivers of Automatic Stay: Are They Enforceable? (99 Kb -- PDF) - opens in new window
This article discusses the use of provisions in loan workout documents that waive the "automatic stay" of enforcement actions by the lender under Section 362(a) of the Bankruptcy Code in the event of a subsequent bankruptcy filing by the borrower, and whether such pre-petition waivers are valid and enforceable. The article also reviews the case law in this area, and provides drafting suggestions to improve the chances that such a provision will be held to be enforceable.

REITs and the Capital Markets

History and scope of REITS as well as various updates on REIT issues, including percentage-rent issues for REITs as shopping-center landlords; the statutes, rules and regulations that govern REIT transactions and case law in this area.
REITs As Landlords: Percentage Rent
This article discusses special statutory and regulatory rules and constraints that apply to real estate investment trusts, as they relate to rental income (in particular, percentage rent) received by REITs as landlords of shopping centers.
REITs: Analysis and History
This article describes the history of Real Estate Investment Trusts, their use in connection with commercial mortgage backed securities and conduit lending, mortgage REITs, the downside to REITs, and title insurance issues.

Synthetic Leases

Bankruptcy/recharacterization issues; comparison of synthetic leases to other forms of financing and ownership of real estate; accounting standards applicable to REITs; IRS rulings on REITs; lease-leaseback financing; title insurance and recharacterization issues; options to purchase in connection with synthetic-leasing transactions; the use of special purpose entities in connection with synthetic-lease financing; and unwinding synthetic leases.
Bankruptcy Recharacterization Issues in Synthetic Leasing Transactions:
This article discusses the bankruptcy recharacterization risks in synthetic leasing transactions. It analyzes the applicable statutory and case law in this area, including the factors that bankruptcy courts consider when deciding whether a document designated as a lease is in fact a security transaction. It also discusses the consequences of such a recharacterization by a bankruptcy court.
'Doing Business' Issues for Lessors/Lenders in Synthetic Lease Transactions
This article discusses the issue of whether, if a lessor/lender is actually making a loan to the lessee in a synthetic leasing transaction, it is "doing business" in the state where the property is located and therefore must legally qualify to do business in that state.
BANKRUPTCY ISSUES IN SYNTHETIC LEASING AND SALE-LEASEBACK TRANSACTIONS
During the past several years many United States and foreign banks, as well as other capital sources, have become increasingly active in offering "off-balance-sheet" financing for corporate real estate acquisition, construction, and expansion (although this activity has slowed considerably after the Enron debacle and the issuance of new accounting rules by the Financial Standards Accounting Board requiring that the assets being financed be shown on the corporate user's balance sheet). This method of structured financing became attractive to a corporate user of real estate because, if properly structured as a true "synthetic" leasing transaction, the lessee/corporate user could expense the rental payments it makes to the lessor under the synthetic lease, and its balance sheet would not be "tainted" by a real property asset (and ownership) or by the existence of mortgage debt. However, the lessee/corporate user would retain all the tax benefits and burdens of ownership, including the ability to depreciate the improvements located on the real property and obtain any appreciation upon a subsequent purchase of the real property from the lessor or upon resale to a third party.
IRS Issues Field Service Advisory on Synthetic Leases
This article discusses and analyzes the IRS Private Letter Ruling issued on May 21, 1999, which concluded that, based on all the facts and circumstances, a real-estate synthetic leasing transaction involving a retail distribution, storage, production and outlet financing facility was a valid and enforceable alternative financing arrangement under the Internal Revenue Code.
Lease-Leaseback Financing
This article discusses and analyzes a new form of real estate financing known as a "lease-leaseback" transaction. Although it has features similar to both sale-leaseback and synthetic-leasing transactions, and the legal issues regarding recharacterization and title-insurance coverage are similar, it is uniquely structured to provide benefits to a developer of commercial real estate improvements as well as certain types of investors and financing sources.
Ninth Circuit Issues Ruling on Synthetic Lease Transaction
A summary of the Ninth Circuit Court of Appeals' holding in Unocal v. Kaabipour, which is the first federal appellate opinion dealing directly with a synthetic lease transaction in a real estate context. The article discusses the court's approval of the synthetic leasing structure utilized by the appellee corporation and the court's confirmation that, notwithstanding the designation of the document as a lease, it is in fact an alternative form of financing for the acquisition and development of commercial real estate.
Off-Balance-Sheet Financing and Corporate Governance:Is It a Lease or Indebtedness?
This article discusses a decision by the Delaware Chancery Court, which held that a "supermajority" provision in a corporation's articles of incorporation, which required the vote of 75% of the company's eight stockholders to incur any indebtedness in excess of $15 million, did not apply to an "operating lease format" (i.e., a synthetic lease) entered into by the corporation to finance a gas pipeline expansion. The article provides drafting tips to address this issue.
Off-Balance-Sheet Financing: Synthetic Leases:
Off-Balance-Sheet Financing: Synthetic Leases:
A discussion of the nature, scope and dynamics of "synthetic" lease structures in connection with real estate transactions, as well as the advantages and disadvantages of this type of structured financing.Read More >>
Recharacterization and Title Insurance Issues in Synthetic Leasing Transactions
This article discusses the basics of synthetic leasing transactions, including what parties use it and why, and discusses the risk of recharacterization because it constitutes a lease for accounting and taxation purposes, and a mortgage for real estate purposes. The article also discusses the various title insurance endorsements that are available for such transactions.
Recharacterization Issues In Synthetic Leasing Transactions
This article contains a summary, in outline form, of the risks of recharacterization in synthetic leasing transactions, including recharacterization in bankruptcy, recharacterization by state courts, and environmental recharacterization.
Synthetic Leases: “Bankruptcy Proofing” the Lessee’s Option to Purchase (58 Kb -- PDF) - opens in new window
This article discusses the potential problems encountered by a lessor under a synthetic lease if there is a subsequent bankruptcy filed by or against the lessee, and whether the the lessor will be able to exercise its option to purchase under the lease in the lessee’s bankruptcy proceeding.
SYNTHETIC LEASES: BANKRUPTCY ISSUES (130 Kb -- PDF) - opens in new window
This article discusses and analyzes the recharacterization and other risks inherent in synthetic leasing transactions in the event that a bankruptcy petition is filed by or against one of the parties.
Synthetic Leases: Options/Down Payments in Energy/Turbine Financings:
This article discusses the issue of whether a down payment or payment for an option to purchase, in connection with a synthetic leasing transaction involving an energy company (and in particular, a turbine or generator, which is considered to be the same as real estate or else deemed to be "integral equipment," would constitute a "hard cost" or a "soft cost" under EITF 96-21 issued by the Financial Accounting Standards Board.
Synthetic Leases: Summary of FASB Emerging Issues Task Force Issue No. 97-10
An analysis, in outline form, of the recently issued statement by the Financial Standards Accounting Board's Emerging Issues Task Force regarding the treatment for financial accounting purposes of build-to-suit real estate projects where an entity that is involved with the construction of the project leases it upon completion of the construction.
Synthetic Leases: Transfer and Recording Taxes
This article discusses recent developments with respect to tax department rulings and statutes in New York and Florida (both of which have significant taxes on mortgages), which enable the participants in synthetic-lease transactions to avoid "double taxation" of the lease/mortgage entered into by the SPE lessor and the lessee, and, in some circumstances, to avoid deed transfer taxes as well.
The Effect of Proposed Accounting Rules on the Use of SPEs in Synthetic Leasing Transactions
This article discusses recent final and proposed Interpretations issued by the Financial Accounting Standards Board (FASB) with respect to guarantees of SPE obligations and the consolidation of assets and liabilities of certain SPEs, respectively, which will impact the use of SPEs in synthetic-leasing transactions (as well as other forms of real-estate financing).
Title Insurance Issues in Synthetic Leasing Transactions
This article discusses title-insurance issues in synthetic leasing transactions, including alternative Owner’s and Loan Policies, recharacterization endorsements, endorsements for the owner’s option rights to purchase the property, and other endorsements.
Unwinding a Synthetic Lease - Effect on Title Insurance
This article discusses the effect of the new FASB rules, regarding consolidation and disclosure, on synthetic leases, and the "unwinding" of many synthetic leasing transactions as a result of implementation of the new FASB rules. The article also discusses the benefits of the ALTA leasehold policy in connection with synthetic leases, the payment of transfer taxes in connection with unwinds of synthetic leases, and the availability of specific title coverages and endorsements in connections with such unwinds.
Use of Special Purpose Entities in Synthetic Leasing Transactions
This article contains , in outline form , a discussion and analysis of the isssues raised in synthetic leasing transactions when a special purpose entity("SPE") is utilized as the lessor ,including typical provisions in the agreement creating the SPE , applicable Financial Accounting Standards Board rulings and bulletins , and bankruptcy concerns.

Title Insurance

The standard ALTA Owner's and Loan policies; title insurance as an aid in avoiding malpractice claims in real estate transactions; benefits of the leasehold endorsements adopted by the ALTA in 2001; coinsurance and reinsurance; creditors' rights risk; closing protection letters; encroachments and encumbrances; the use of land trusts in real estate transactions; "unmarketability" of the title; ALTA endorsement coverages adopted by the ALTA, including those adopted in 2003-04; RESPA issues; special concerns of lenders in connection with title insurance; tie-in and aggregation endorsements; title insurer duties to third parties; title insurance in connection with transfers to trusts; the unauthorized practice of law; and negligent misrepresentation claims against title companies.
The ALTA Standard Loan Policy – 1992: - opens in new window
This article provides a comprehensive discussion and analysis of the current ALTA loan policy, including the types of loan policies, the differences from an owner's policy, the insuring provisions and scope of coverage, exclusions from coverage, and conditions and stipulations. The article also contains several policy forms as exhibits.
Attorney Malpractice in Real Estate Transactions: Is Title Insurance the Answer? - opens in new window
This article discusses the attorney malpractice risks in connection with real estate transactions; notably the issue of whether the failure of an attorney who represents the purchaser of a property to obtain a title commitment and an owner’s policy of title insurance constitutes legal malpractice, and whether this duty should, under certain circumstances, extend to third parties. The article also discusses the issue of whether an attorney commits legal malpractice by not requiring a fee owner of real estate to obtain a title insurance commitment or policy, and examines recent case law in this area.
Benefits of the New Leasehold Endorsements for Owner's and Loan Policies: - opens in new window
This article discusses the features of the ALTA 13 Leasehold Owner's Endorsement and the 13.1 Leasehold Loan Endorsement, which were adopted by the American Land Title Association on October 13, 2001. The article explains the benefits of the new endorsements and the difference between the coverages provided thereunder and those available under the 1975 owner's and lender's policy forms, which are now withdrawn.
Closing Protection Letters: What is (and is not) Covered? - opens in new window
This article describes and analyzes the relationships and responsibilities that exist between title insurers, agents, and approved attorneys with respect to closing a transaction that is the subject of title insurance. It also analyzes the case law regarding the obligations of title insurers with respect to closing protection letters, and discusses the various forms of closing protection letters utilized in connection with insured real estate transactions.
Coinsurance and Reinsurance: - opens in new window
This article gives a brief overview of coinsurance and reinsurance issues with respect to title insurance, including the difference between the two, the nature and scope of each, and the variations available. The article includes, as exhibits, the standard ALTA form of Facultative Reinsurance Agreement and a sample form of Coinsurance Endorsement.
Creditors' Rights Issues in Loan Transactions
This article contains an exhaustive analysis of creditors' rights issues in mortgage loan transactions, including fraudulent conveyances, preferential transfers, equitable subordination, leveraged buyouts, "upstream," "downstream," and "cross-stream" transfers, reasonably equivalent value, the "insolvency," "capitalization," and "cash flow" tests, and the "DePrizio doctrine."
EQUITABLE SUBORDINATION ISSUES
Failure to Disclose Zoning Restriction: Attorney Malpractice?
This article summarizes a Connecticut trial court decision, which held that an attorney retained by the purchasers in connection with a residential closing was not guilty of professional malpractice for failing to review the local zoning records to determine whether there was a use restriction in effect on the property that limited its use to seasonal occupancy, or for failing to advise the purchasers that the title search he conducted did not address zoning issues. The article also discusses the applicability of title insurance and the additional zoning coverages provided by the new ALTA Homeowners Policy.
Insurance of a Secured Lender's Interest in Rents Pursuant to a Separate Assignment of Rents.
A discussion of the availability of title insurance coverage and/or endorsements with respect to the interest of a commercial lender in the rents, income and profits generated by the secure property.
The Unauthorized Practice of Law: What is Prohibited in Illinois Real-Estate Transactions?
This article focuses on the Illinois Supreme Court's holding in King v. First Capital Financial Services, Inc., a case of first impression in Illinois, which held that lending institutions do not engage in the unauthorized practice of law by preparing loan documents for their own use and charging borrowers a fee for document preparation. The court ruled that the actions of the lenders fell under the "pro se" exception in Illinois law to what would otherwise would be the unauthorized practice of law, i.e., this exception applies to the preparation of documents in situations where the party preparing the legal documents does so for his or her own benefit in a transaction to which the preparer is a party. The court also ruled that the charging of a fee was irrelevant because it is the character of the acts themselves, and not whether a fee is charged, that determines whether a party engaged in the unauthorized practice of law.

The article also discusses the emergence of "do it yourself" legal-document-preparation services, as well as the American Bar Association's proposed Model Definition of the Practice of Law.
The Unauthorized Practice of Law: What is Prohibited in Real-Estate Transactions? (105 Kb -- PDF) - opens in new window
This article analyzes and discusses the case and statutory law, as well as regulations, in various states regarding the unauthorized practice of law in real estate transactions.
Three Critical Phases of Concern for Lenders with Regard to Title Insurance:
A discussion of the title insurance concerns of commercial real estate customers in connection with loan documentation, workouts/foreclosures, and litigation/policy claims.
Title Insurance - The Commercial Lender's Perspective- 'Open' Title Commitments
An analysis of and discussion of the specific concerns of commercial real estate lenders with respect to title insurance coverages and endorsements.
Title Insurance Coverage for Clogging Issues
This article discusses the "clogging" doctrine as it applies to the situation where the mortgagor grants the mortgagee an option to purchase the secured property, and also discusses the forms of title coverages and endorsements available to minimize the title risks in these types of transactions.
Transfer to Trust: Does Title Insurance Continue?
This article discusses a recent Kansas case, Redmond v. Kester, in which the court held that a Chapter 7 bankruptcy debtor may claim the homestead exemption where the real property was transferred to a revocable trust prior to the bankruptcy and the bankruptcy debtor was both the settlor and a beneficiary of the trust. The court also noted that under a Kansas statute "the transfer by warranty deed of real property into an inter vivos trust shall not affect the coverage of any title insurance if the settlor of such trust is and remains a beneficiary of such trust during the settlor's lifetime." This statute also provides that upon the transfer taking effect, the trustee shall be deemed to be the insured under the original title policy, and that the transfer shall not affect any exemption or homestead rights. The court ruled that even though the conveyance was by quitclaim deed and not by warranty deed, the court ruled that the statute should be viewed broadly so as to cover any type of conveyance by the "owner" into the trust.

Uniform Commercial Code (Article 9)

Attorney malpractice for failure to file a UCC Financing Statement; benefits of the UCC insurance policy; the effect of a UCC-3 Financing Statement where both the amendment and the termination boxes are checked; limitation of liability for UCC searches by search companies; UCC Article 9 issues in connection with mezzanine financing transactions; whether a security interest in an option to purchase real estate can (or should) be perfected with a UCC filing; perfection under revised Article 9; and the sufficiency of the debtor's name for a valid UCC filing.
Attorney Malpractice Liability for Failure to File UCC Financing Statement:
This article discusses a recent New York appellate decision, which held that an attorney was liable for per se legal malpractice for failure to file a UCC-1 financing statement on behalf of his lender client. The article also discusses the availability and use of UCC insurance as a method of preventing such liability.
Perfecting and Enforcing a Security Interest in an Option to Purchase Real Estate
This article discusses whether, and under what circumstances, a security interest in an option to purchase real estate constitutes an interest in personal property (in which event the applicable Uniform Commercial Code perfection provisions, as modified by the recent revisions to Article 9, would apply) or real estate (in which event the interestwould be need to be properly recorded in the applicable real estate records). The article aslo discusses the impact of the recent revision to Article 9 of the UCC with respect to this issue, as well as applicable bankruptcy court descisions. The article further contains suggestions for lenders on how to protect and properly perfect security interests in such options to purchase.
Perfection under Revised UCC Article 9: The Importance of Determining the Proper Location of the Debtor's Place of Business
This article discusses and analyzes a UCC decision by the Delaware Federal District Court, which held that a secured creditor's security interest in proceeds of a real estate contract was not an "interest in or lien on real estate" of the kind specifically excluded from the scope of Article 9 of the Uniform Commercial Code, but was in the nature of a general intangible interest. The court also ruled that the debtor had failed to properly perfect its interest in the sale contract, and that "good faith reliance" on the address provided by the debtor is no defense to a failure to file a financing statement in the proper jurisdiction. The article also discusses the issue of "realty v. personalty" in general, and describes the efficacy of UCC insurance in dealing with the issues raised by this case
Sales and Assignments of Promissory Notes Under Revised Article 9 of the Uniform Commercial Code
This article summarizes the rules regarding security interests in sales and assignments of promissory notes under Revised Article 9 of the Uniform Commercial Code, which was enacted into law in all 50 states in 2001. The article discusses the rules that apply with respect to "true sales" of promissory notes and to loans secured by interests in promissory notes, and whether the recording of an assignment of mortgage is still necessary -- or sufficient -- under Revised Article 9 to perfect a security interest. The article further discusses issues with respect to enforcement of the security interest, and the interplay of Revised Article 9 and Article 3 of the Uniform Commercial Code where the note itself has been lost or is not in possession of the party seeking to enforce the security interest.
Sufficiency of Debtor’s Name for Valid UCC Filing
This article discusses a ruling by the Bankruptcy Appellate Panel of the Tenth Circuit Court of Appeals, In re Kinderknecht, which ruled that the bankruptcy court erred in declining to grant the avoidance of a lien perfected by a UCC-1 filing that named the debtor only by his commonly used nickname rather than his proper name. The article discusses in detail the requirements for properly stating the debtor's name (whether individual or business) to insure perfection and priority of the lender's security interest. The article also discusses other case law in this area (both before and after the revisions to Article 9 of the Uniform Commercial Code) and discusses the benefits of UCC insurance with respect to the issues raised in the Kinderknecht (and similar) cases.
The Effect of a UCC-3 Financing Statement Where Both the Amendment and Termination Boxes Are Checked
This article analyzes, under Revised Article 9 of the UCC, the issue of whether a UCC-3 Financing Statement, intended only as an Amendment but with the Termination box also checked inadvertently, constitutes an effective termination of the original Financing Statement with respect to all of the collateral, or only an amendment partially releasing the specific collateral described therein.
Title and UCC Issues in Connection with Sales and Assignments of Defaulted CMBS Loans (63 Kb -- PDF) - opens in new window
This article discusses the title and related issues involved when a title insurer is asked to insure the valid assignment of a mortgage from the original lender of a mortgage that is later securitized and assigned to a servicer or to a named third party as trustee of a securitized trust. Under the UCC, the mortgage will automatically follow the note and will be automatically perfected, but separate reasons may exist to record an assignment of mortgage.
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