Bloomberg BNA Banking Daily Guest Article: Stopping the Bleeding: Pre-Foreclosure Rights and Equity Collateral

04/21/2014


Taking equity interests of a privately held company as collateral is a common occurrence for many secured creditors in a wide variety of financing structures. What is not as common perhaps is for secured creditors to analyze, at the initial stages of a transaction, the road maps that may serve to mitigate any meaningful delays or diminutions in the value of such collateral in a foreclosure scenario. When a secured party is taking equity interests of privately held companies, the potential for a drawn out and difficult foreclosure process should be vetted at the structuring stage of a transaction due to the applicable provisions of Article 9 of the Uniform Commercial Code, as enacted pursuant to applicable state law (the ‘‘UCC’’). In particular, the secured party should be aware of the parameters and uncertainties regarding the permitted scope of its conduct after a default but prior to a foreclosure with respect to such collateral.

In order to manage and mitigate such risks while simultaneously avoiding any lender liability claims after a default, a secured creditor needs to consider (i) its rights under the applicable UCC provisions and (ii) the scope of the power of attorney in relevant security documents and (iii) have a well-informed foreclosure strategy going into the applicable transaction.

Excerpted from the Bloomberg BNA Banking Daily, April 21, 2014. To view full article, click here (subscription required).

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