Cross-Collateralization Clauses in Bankruptcy: Enforcement Challenges for Lenders

Resolving Lender Priority Disputes and Protecting Collateral in the Face of Dragnet Clauses

Recording of a 90-minute CLE webinar with Q&A

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Conducted on Tuesday, April 8, 2014

Recorded event now available

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Course Materials

This CLE course will discuss the enforceability of cross-collateralization clauses in bankruptcy, recent case law regarding lender priority disputes and bankruptcy financing, and best practices for secured creditors to protect their priority in the event of the borrower's bankruptcy.

Description

Cross-collateralization clauses are common in consumer loans and are used in commercial financing as well, particularly commercial real estate mortgages. These clauses can wreak havoc in a borrower’s bankruptcy, as secured creditors compete for the priority of their liens. 

A recent Seventh Circuit Court of Appeals case upheld a cross-collateralization clause against a junior lienholder in a bankruptcy involving commercial real estate loans, based on the fact that the junior lender had actual notice of the provision in the senior loan documents.

Counsel to junior lenders should look into whether there is a cross-collateralization provision in the senior loan. If so, counsel must consider protecting the junior lender with an intercreditor agreement—and inquiring about other loans the borrower may have.

Cross-collateralization is also a key tool for lenders in providing bankruptcy financing. Courts tend to disfavor or heavily scrutinize future cross-collateralization involving pre-petition debt secured by post-petition collateral. Backward cross-collateralization is far less controversial.

Listen as our authoritative panel of attorneys discusses the enforceability of cross-collateralization provisions in bankruptcy, recent bankruptcy case law regarding dragnet clauses in borrower loans as well as DIP financing, and best practices for both senior and junior lenders to protect their priority in the event of the borrower's bankruptcy.

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Outline

  1. Cross-collateralization of mortgages
  2. Cross-collateralization of non-mortgage loans
  3. Best practices for senior lenders in enforcing cross-collateralization provisions
  4. Best practices for junior or second lien lenders to protect their priority

Benefits

The panel will review these and other key questions:

  • What steps can senior lenders take to maximize the effectiveness of a cross-collateralization provision in the senior loan?
  • What steps can junior lenders take to avoid being squeezed out by the cross-collateralization clause of the senior lender’s lien?
  • How have courts treated cross-collateralization in debtor-in-possession financing and what factors should lenders be cognizant of when incorporating these provisions in DIP deals?

Following the speaker presentations, you'll have an opportunity to get answers to your specific questions during the interactive Q&A.

Faculty

Mark A. Bogdanowicz
Mark A. Bogdanowicz
Atty
Howard & Howard

Mr. Bogdanowicz concentrates his practice in the areas of business and corporate and commercial litigation, with an...  |  Read More

Richard A. Chesley
Richard A. Chesley
Partner
DLA Piper LLP (US)

Mr. Chesley practices in the areas of corporate restructuring, with an emphasis on bankruptcy transactions both in the...  |  Read More

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