ALI-ABA Course of Study

Commercial Real Estate Defaults, Workouts, and Reorganizations

March 5 - 7, 2009

Orlando, Florida

TABLE OF CONTENTS

Page

PROGRAM xi

FACULTY PARTICIPANTS xv

STUDY MATERIALS

1. Real Estate Workouts

By John D. Hastie

1

Study Material 3

Addendum A: Default Notice 13

Addendum B: Pre-Negotiation Letter (jury friendly) 15

Addendum C: Pre-Negotiation Letter (much more complete, but perhaps

not so jury friendly)

18

Addendum D: Forbearance Agreement 24

Addendum E: Loan Modification Agreement 38

Addendum F: Revolving Loan Agreement 55

2. What To Do About the Problem Project

By William G. Murray, Jr.

89

3. Outline of Workout Issues

By William G. Murray, Jr.

109

4.

Working Out Mortgage Loans and B Notes

By Richard D. Jones

Submitted by Thomas F. Kaufman

115

Table of Contents 117

Study Material 119

5.

Mezzanine Loan Workouts

By Richard D. Jones

Submitted by Thomas F. Kaufman

159

Table of Contents 161

Study Material 165

6.

When the Workout Fails

By Richard D. Jones

Submitted by Thomas F. Kaufman

197

Table of Contents 198

Study Material 201

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7. Loan Documents

By Jill D. Block

233

Mezzanine Note 235

Mezzanine Loan Agreement 238

Mezzanine Recourse Guaranty 273

Senior Note 287

Senior Loan Agreement 290

Senior Recourse Guaranty 339

Senior Completion Guaranty 349

Intercreditor Agreement 360

8. Conveyances in Lieu of Foreclosure

By John D. Hastie

395

Study Material 397

Addendum A: Settlement Agreement 404

Addendum B: Alternative Settlement Agreement Provisions 452

9. Deeds in Escrow: Are They Enforceable?

By John C. Murray

453

Study Material 455

Appendix: Deed in Escrow Agreement 474

10. Creditors Remedies Under State Law

By John A. Gose and Aleana Harris

483

11. Bankruptcy Considerations

By Henry C. Kevane and James R. Stillman

495

Study Material 497

Opinion in In re Fleming Companies, Inc. of March 31, 2004 501

Opinion in In re DVI, Inc. et al. of April 30, 2003 510

Opinion in In re Chameleon Systems, Inc. undated 519

Memorandum Order in In re Integrated Telecom Express, Inc. of May 19,

2004

530

12. Surviving a CMBS Bankruptcy

By Sheri P. Chromow and K.C. McDaniel

551

13.

Precision Industries, Part 1: Debtor-Lessor's Property May Be Sold "Free

and Clear" of Unexpired Lease

By John C. Murray

567

14.

Precision Industries, Part 2: How Leasees and Leasehold Mortgagees Can

Protect Themselves

By John C. Murray

575

15. Tax Aspects of Debt Restructuring, Workouts, and Foreclosure

By Wendi L. Kotzen

581

Table of Contents 582

Study Material 585

16. Balancing the Automatic Stay

By Roger Bernhardt and James R. Stillman

609

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17. Commencement of a Business Bankruptcy Case

By Richard F. Broude

617

Table of Contents 618

Study Material 619

18.

Disclosure Statements: Confirmation and Cramdown of Chapter 11

Plans

By Barbara J. Houser, Douglas W. Carvell, and Holly D.F. Meister

635

Table of Contents 637

Table of Cases 639

Study Material 651

19. Adequate Protection, the Automatic Stay and Use of Cash Collateral

By Margaret A. Mahoney

691

20.

Classification of Claims

By Barbara J. Houser, Thomas S. Henderson, Richard M. Rosenberg,

Shari A. Wilkins, Jenny J. Hyun, and Douglas E. Deutsch

Updated by Erithe A. Smith and William C. Hilman

Submitted by Margaret A. Mahoney

713

Table of Contents 715

Table of Cases 716

Study Material 719

21. Confirmation of Chapter 11 Plans

By Margaret A. Mahoney

737

22.

Chapter 11 Plan Confirmation is Governed by 11 U.S.C. Section 1121

Through 1146 of the Bankruptcy Code

By Kimberly W. Osenbaugh and David C. Neu

747

23. Cash Collateral Use and Use, Sale, and Lease of Property in Bankruptcy

By Margaret A. Mahoney

759

24. Preferences and Fraudulent Transfers

By Margaret A. Mahoney

779

25. Executory Contracts and Unexpired Leases in Bankruptcy

By Richard F. Broude

793

Table of Contents 795

Study Material 797

26.

Asset Sales in Bankruptcy: Break-Up Fees, Window Shop and Sales Free

and Clear of Leasehold Interests

By Josephina Fernandez McEvoy

851

27.

Asset Sales in Bankruptcy: Break-Up Fees, Topping Fees and Sales Free

and Clear of Leasehold Interests

By Kimberly W. Osenbaugh and David C. Neu

863

28. Use of Bankruptcy by Solvent Debtors: What is Good Faith?

By Kimberly W. Osenbaugh and David C. Neu

875

29. Professional Responsibility Hypothetical Cases

By John D. Hastie

883

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30.

Retention of Professionals in Bankruptcy Cases: Ethical Issues and

Special Considerations

By Marcia L. Goldstein

Submitted by John P. Hastie

889

31.

Commercial Real Estate Defaults, Workouts, and Reorganizations

Presentation Slides (Handout)

By Thomas F. Kaufman

921

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ALI-ABA Course of Study Commercial Real Estate Defaults, Workouts, and Reorganizations

March 5-7, 2009 Orlando, Florida

PROGRAM

Thursday, March 5, 2009 8:00 a.m. Registration and Networking Session Webcast Segment A 9:00 a.m. Introductory Remarks 9:05 a.m. Analyzing the Default and the Loan Documentation Identifying the cause and extent of the default, potential parties in interest and their objectives, probable outcomes, and available assets; document assembly, review of the closing documents and related material, conferences with client personnel, position review, analysis of possible personal liability; third-party exposures, multiple liens, and the effect of tenant financial problems; analysis of collateral; viability of single purpose entities; affiliates of single purpose entities; effectiveness of the bankruptcy remoteness of the borrowing entity; analysis of securitized document remedies; liabilities of the parties to the pooling and servicing agreement; reviewing claims against and remedies available to junior lenders; establishing the priorities of multiple tranches; consideration of client objectives, constraints, and relevant legal limitations 10:30 a.m. Networking Break 10:45 a.m. Negotiating and Documenting the Restructure

Approaches to restructuring; pre-negotiation agreements and disclaimer letters; negotiating strategies and their impact on the participants; holding arrangements during workout negotiations; analyzing the positions, exposures, and potential workout benefits of various parties; dealing with special servicers; cash flow arrangements and traps; forbearance and moratoriums; liability limitations, releases, and realizations of collateral; future advances; rating agency requirements and approvals; risks of substantive consolidation; use of administrative consolidation; tax considerations; standstill agreements; bankruptcy risks; use of escrows and reserves; environmental concerns; lender liability exposures arising from negotiations; third-party involvement; title insurance considerations; management pending the workout closing; negotiation formats, performance schedules, "drop dead" dates, interim reporting requirements, and access agreements; default notices and acknowledgments; reinstatement agreements; foreclosure agreements and modification agreements; asset transfers; recoupment devices; inter-creditor agreements; performance "give-back" and earn-out agreements; subordination agreements; conditional releases from liability; title insurance policies and endorsements; anticipating post-modification bankruptcy issues (bankruptcy-related provisions of workout agreements); dealing with subordinate liens, related assets, and executory obligations; cash flow provisions; limitation of remedies; payment of legal fees and other workout costs; releases, indemnities, guarantees, and additional collateral; control of rents and receivables and lender dealings with borrower's tenants; third-party claims; payment of employees, franchise fees, and

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taxes; realization under letters of credit; legal and other professional opinions; use of escrows and reserves; lock box and other security devices; post-restructure management; use of workout entities; reporting requirements; management incentive compensation

12:30 p.m. Lunch Break Webcast Segment B 2:00 p.m. Construction Loan Defaults

Monitoring a construction loan; troubled situation strategies for borrowers, lenders, contractors, and sureties in for-sale and investment-property projects; protection and assertion of rights under bonds; dealing with contractors, tenants, condominium and home associations, and contract purchasers; strategies in restructuring the loan for unfinished projects, including escrow agreements, out-of-balance provisions, collateral mortgages, and other additional security; contractor and investor involvement in workout joint ventures; enforcement of completion guarantees and performance and payment bonds; protective provisions and procedures for construction loan documentation; mechanic's lien issues; title insurance claims

2:30 p.m. Defaults Involving Insolvent Financial Institutions FIRREA revisited; superpowers of federal agencies; the D’Oench Duhme Doctrine, its limits and possible preemption by 12 U.S.C. § 1823(e); federal holder-in-due-course status; 12 U.S.C. § 1825 (b)(2) Avoidance of Enforcement Actions; 12 U.S.C. § 1821 (j) Avoidance of Restraints; repudiation of “burdensome” contracts; repudiation of real estate contracts; actions against institution affiliated parties; use of pass-through receiverships; determination of claims; risks to attorneys representing the institution and attorneys asserting borrower claims

3:30 p.m. Networking Break 3:45 p.m. Lender and Third-Party Liability

Theories of liability; negotiation and litigation strategies; guarantors and the anti-deficiency statutes; waiver of defenses by guarantors; letters of credit; guaranties of payment and of collection; collateralized guaranty agreements; limited guaranties; guarantor defenses; novel defenses (e.g., a defense asserting that the financial crisis in the credit markets is a force majeure event, and a defense claiming that the sale of interests in a construction to lenders having no real estate lending experience resulted in a dysfunctional lender group)

4:15 p.m. Conveyances in Lieu of Enforcement When to use them; negotiating strategies; title considerations and title insurance coverage; settlement agreements; conveyance documents; merger; representations and warranties; releases from liability; lease termination agreements; transfer of tenant property

4:45 p.m. Enforcement of Creditors’ Remedies under State Laws; Multistate and Multinational Proceedings

Pre-foreclosure rights of mortgagee; mortgagees in possession; relative rights of multiple mortgagees; title insurance policy exclusions and endorsements; economic waste; election of remedies; deficiency judgment proceedings; mezzanine loan defaults; foreclosure of mezzanine loan collateral; one-action and similar rules; receiverships; asserting liens and security interests against multistate collateral

5:15 p.m. Questions and Answers 5:30 p.m. Adjournment for the Day; Networking Reception for Faculty and Registrants

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Friday, March 6, 2009 8:30 a.m. Networking Session Webcast Segment C 9:00 a.m. Overview of the Bankruptcy Court System

The bankruptcy alternatives; Chapters 7 and 11; voluntary and involuntary cases; partnership cases; the role of committees

9:45 a.m. Adequate Protection in the Real Estate Context The automatic stay; use and sale of real estate during a pending case; rental income as cash collateral; debtor-in-possession financing and super priority; the under-secured creditor and cost of delay; prospect for effective reorganization; single asset real estate; environmental obligations

10:45 a.m. Networking Break 11:00 a.m. Chapter 11 Reorganization Plans

Who proposes the plan; the plan contents; non-recourse debt; Section 1111(b) elections; impairment of claims; voting and requisite majorities; confirmation standards and cramdown; equitable subordination; the absolute priority rule and the new value exception; single asset real estate; discharge of third parties; availability of general partner’s assets; post-confirmation proceedings; Chapter 11 liquidations

12:30 p.m. Lunch Break Webcast Segment D 2:00 p.m. Preferences and Fraudulent Transfers

Sections 547 and 548 of the Bankruptcy Code; Uniform Fraudulent Transfers Act; reducing the lender’s exposure; title insurance exclusions and endorsements

2:30 p.m. Leases and Other Executory Agreements in Bankruptcy Preservation and transfer of the debtor’s leasehold interests; leasehold interests as an asset of the debtor’s estate; the lessor’s need to act promptly and the steps to be taken; effect of rejection by lessor or lessee; limitation on lessor’s claim under a rejected lease; assumption and assignment; shopping center provisions; pre-qualification; Reciprocal Easements Agreement (REA) rejection issues; enforcement of operating covenants; appeals, stays, and the mootness doctrine; development phase tenant bankruptcies; effect of tenant bankruptcy on project financing and co-tenancy requirements; bankruptcy threats by prime tenants and co-tenants; amendments to lease agreements; threat of sale as a negotiating device; problems associated with the insolvency of a sandwich lessor; rights and risks of a subtenant; transfers of tenant security deposits and trade fixtures; bankruptcy-focused drafting and structuring considerations in negotiating leases; shopping center issues

3:30 p.m. Networking Break 3:45 p.m. Sales of Real Estate in a Bankruptcy Context

Auction sales as a reorganization and liquidation device; sales free and clear under Section 363 of the Bankruptcy Code; bidder pre-qualifications; pre-negotiated sales; overbid requirements; specific property problems, including broken condominium developments, burdened retail pads, failing office buildings, and empty hotels; use of stalking horses; allowable break-up fees; negotiating strategies; risks of sale and plan confirmation

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4:45 p.m. Bankruptcy Filings by Solvent Debtors Continuing development of the "Good Faith Doctrine"; use of bankruptcy proceedings to avoid pending litigation, unprofitable obligations, burdensome leases, inability to replace existing financing and other financial distress; restructuring a retailer through bankruptcy; the necessity for DIP financing

5:15 p.m. Questions and Answers 5:30 p.m. Adjournment for the Day Saturday, March 7, 2009 8:30 a.m. Networking Session Webcast Segment E 9:00 a.m. Ethical Concerns Incident to Representing Debtors and Creditors

Analysis of ethical issues incident to asset protection planning; ethical issues relevant to representation of debtors, lenders, and third parties affected by real estate defaults; FIRREA liability of Institution Affiliated Parties; obligations of restructure counsel in the “zone of insolvency”; failing the bankruptcy tests for “disinterestedness”; conflicts of interest and other issues in commencement and continuation of representation

10:00 a.m. Recent Developments Impact of the Emergency Economic Stabilization Act of 2008; the future of CMBS and mezzanine financing; the required loan to value ratio after the market collapse; the impact of participation in the TARP on the ability and willingness of a lender to restructure defaulted real estate loans; when and how acquisitions of raw land can be financed in the future (the increased importance of purchase money financing); what a borrower can expect if a real estate loan is subject to management by the Financial Stability Oversight Board; opportunities for acquisition of defaulted real estate projects

10:45 a.m. Networking Break 11:00 a.m. Recent Developments (continued)

Maturity defaults in CMBS facing portfolio lenders in 2009 and 2010; the effect of re-pricing of risk and increasing capitalization rates on values and financing; the long term outlook for sources of real estate finance; the need for additional equity; the impact of the retail meltdown

11:30 a.m. Questions and Answers 12:30 p.m. Adjournment Total 60-minute hours of instruction: 16.25, including one hour of ethics

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ALI-ABA Course of Study Commercial Real Estate Defaults, Workouts, and Reorganizations

March 5-7, 2009

Orlando, Florida (Walt Disney World)

PLANNING CHAIR

John D. Hastie, Esquire Phillips & Murrah, P.C.

Suite 444 401 West Main Street Norman, OK 73069

FACULTY

Jill D. Block, Esquire Orrick, Herrington & Sutcliffe LLP 666 5th Avenue New York, NY 10103 Richard F. Broude, Esquire Richard F. Broude, P.C. #22A 400 East 84th Street New York, NY 10028 Thomas F. Kaufman, Esquire Hunton & Williams LLP 1900 K Street NW Washington, DC 20006 The Honorable Margaret A. Mahoney U.S. Bankruptcy Judge

U.S. Bankruptcy Court 201 St. Louis Street Mobile, AL 36602 William G. Murray, Jr., Esquire Orrick, Herrington & Sutcliffe LLP 11th Floor 405 Howard Street San Francisco, CA 94105 Louis J. Timchak, Jr., Esquire 18810 Place Antibes Lutz, FL 33558-5341 813-948-6624 813-948-6699 FAX ltimchak@verizon.net

For biographies of these faculty members, please go to www.ali-aba.org/CP060

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