USA Law and Practice Contributed by: Michael Chernick, Sara Coelho, John Chua and Josh Tryon, A&O Shearman
Structural subordination arises where obligations incurred or guaranteed solely by a borrower are effec- tively junior to obligations incurred or guaranteed by a subsidiary of the borrower, to the extent of that sub- sidiary’s assets. In any insolvency scenario, the sub- sidiary’s creditors have the right to be repaid by such subsidiary (or out of its assets) as direct obligations of such entity before creditors of the parent borrower – such subsidiary’s equity holder – are repaid. Where the parent borrower is primarily a “holding company” for the equity interests of its operating subsidiaries, creditors of an operating subsidiary will be paid in full in priority to the holding company’s creditors from assets of such subsidiary. 5.8 Priming Liens Mechanic’s liens arise when contractors, subcontrac- tors or suppliers are unpaid for work performed or materials supplied. This lien is a security interest in the property. If the owner tries to sell the property, the debtor will have a secured interest in the portion of the proceeds needed to pay the debt. Tax liens are placed against property by the local, state, or federal government, as authorised by stat- ute, for delinquent taxes, including property, income, and estate taxes. A judgment lien is any lien placed on the defendant’s assets as a result of a court judgment. Possible structuring concerns will focus on prop- erly conducting due diligence on any possible liens, including conducting searches and other disclosure requirements as set forth in the credit documentation. 6. Enforcement 6.1 Enforcement of Collateral by Secured Lenders Loan and security documentation generally provide a customary set of enforcement rights and remedies to secured parties, exercisable by such parties following the occurrence of a “default event” by an obligor. From a statutory perspective, Article 9 of the UCC gives secured parties the right to proceed with several
enforcement methods after a default event has been triggered by an obligor. These rights include: • the right of a secured party to collect payments directly from a third-party obligor under accounts receivable, deposit accounts or with respect to certain other types of intangible assets; • the right of a secured party to repossess collateral, either through the institution of judicial proceedings or through a non-judicial action; and • the right of a secured party to dispose of the col- lateral through a public or private sale process. However, to exercise such remedies under Article 9, secured parties also have an obligation to comply with certain statutory requirements. Such requirements are designed to protect obligors and generally provide that the time, place and/or manner of exercising such rem- edy must be commercially reasonable, that sufficient advance notice is provided to the relevant obligor and that certain other creditors who have an interest in the collateral are given adequate notice where such sale process involves a public sale or auction. 6.2 Foreign Law and Jurisdiction New York courts generally permit parties to a loan agreement to select a particular foreign law to govern their contract unless the choice of law conflicts with public policy or there is no reasonable basis for the parties to choose such law to govern their contract (ie, the law selected has no real relationship to the parties or the transaction), then the courts may decline to enforce the selected governing law. In terms of conflict of laws rules, New York’s rules will generally uphold foreign forum selection clauses so long as the selected jurisdiction has a reasonable relationship to the transaction – more specifically, a significant portion of the agreement was negotiated, or the agreement was substantially performed, in such jurisdiction. In cases involving foreign states, the Foreign Sover- eign Immunities Act will permit a waiver of immunity either explicitly or by implication.
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