USA Law and Practice Contributed by: Stelios G Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins LLP
7.5 Risk Areas for Lenders A secured party seeking to enforce a loan, guarantees of the loan, and/or a security interest securing such obligations must comply with any legal requirements under applicable law, primarily Article 9 of the UCC for personal property and applicable real property law for real property, and any enforceable terms of the under - lying loan documentation. The UCC provides debtors with various protections that cannot be waived by the debtor prior to default (eg, the right to receive pre- foreclosure notice and the right to have any sale of the collateral conducted in a commercially reasonable manner). There are also overarching doctrines of good faith and fair dealing imposed by state law. A secured party that fails to comply with the require - ments of the UCC risks losing some or all of its defi - ciency claim and could be liable for damages. Also, a secured party that takes control of a company through enforcement of an equity pledge (for instance, by replacing the company’s board of directors or other governing body) prior to actually foreclosing on the shares may have its appointed directors, etc owe fidu - ciary duties to the company (and, depending on appli - cable law, potentially other constituencies in interest in the company). Generally, a lender is not liable under environmental laws for actions of a borrower or other security pro - vider. A lender whose only relationship to a contami - nated site is that it has loaned to the owner or has taken a security interest in the land will not be primarily or secondarily liable under environmental laws for the actions of the owner. However, if a lender exercises management over the property beyond that of a tra - ditional lender, then there may be some risk of liabil- ity. Similarly, if a lender forecloses on a contaminated property to enforce its security interest and becomes the owner thereof, there is a risk that it may thereby subject itself to liability. In bankruptcy, some claims, such as certain environ - mental liabilities, will run with the asset even after a bankruptcy. Creditors should therefore take care in these contexts to avoid accepting unwanted liabilities. Another risk area is industries that are heavily regu - lated and/or which may require regulatory or third-
party approval prior to a change of control (including by exercise of remedies by lenders). 7.6 Transactions Voidable Upon Insolvency The primary focus in the case of avoidance actions would be on preferences and fraudulent transfers, and the primary beneficiaries of any avoidance action are unsecured creditors (except as may be set forth in a DIP financing order). Notably, preferences and fraudulent transfers can be brought both under appli - cable state law as well as under the US Bankruptcy Code, and the requirements of each vary (including the length of the statute of limitations). First, transfers on account of an antecedent debt (debt that precedes the transfer) made within the 90 days prior to the bankruptcy filing when the debtor was insolvent are avoidable as preferences if they permit the creditor to receive more than it would in a hypothetical liquidation under Chapter 7 of the US Bankruptcy Code. The look-back period for insiders is one year as opposed to 90 days. There are a variety of statutory defences and safe harbours to preference claims. Second, transfers of an interest in property of the debtor may be avoidable if (a) they are made with actual intent to defraud or deprive creditors of value, or (b)(i) they are made when the debtor is insolvent or render the debtor insolvent, and (ii) the debtor receives less than their reasonably equivalent value. In addition to preference and fraudulent transfer claims, a debtor in possession or any Chapter 11 estate has the right to pursue any claims of the debtor, including claims for breach of fiduciary duty against directors and officers, such as for approving fraudu - lent transfers (to the extent available under applicable law). Proceeds of avoidance actions are generally unen - cumbered assets available for unsecured creditors. As a matter of practice, an unsecured creditors’ com - mittee will seek to prevent a post-petition DIP lender, especially one that is a pre-petition secured creditor, from obtaining DIP liens over avoidance actions, and bankruptcy judges will often side with the creditors’ committee on this point (although there are many
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