USA Law and Practice Contributed by: Stelios Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins
7.5 Risk Areas for Lenders A secured party seeking to enforce a loan, guarantees of the loan and/or a security interest securing these obligations must comply with any legal requirements under applicable law, primar - ily Article 9 of the UCC for personal property and applicable real property law for real property, and any enforceable terms in the underlying 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 commer - cially reasonable manner). There are also over - arching doctrines of good faith and fair dealing imposed by state law. A secured party who fails to comply with the requirements of the UCC risks losing some or all of its advantage claim and could be liable for damages. A secured party who 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 also have its appointed directors, etc owe fiduciary duties to the company (and, depending on appli - cable law, potentially others with interests in the company). A lender is generally not liable under environ - mental laws for actions of a borrower or other security provider. A lender whose only relation - ship to a contaminated site is that it has lent 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 manage - ment over the property beyond that of a tradi - tional lender, there may be some risk of liability. Similarly, if a lender forecloses on a contaminat - ed 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, certain claims, such as environ - mental liabilities, will run with the asset even after a bankruptcy. Creditors should therefore take care to avoid accepting unwanted liabili - ties in these situations. This issue is particularly in focus for industries that are heavily regulated and/or which may require regulatory approval prior to a change of control (including by exer - cise of remedies by lenders). 7.6 Transactions Voidable Upon Insolvency The primary focus in the case of avoidance actions will be on preferences and fraudulent transfers and the primary beneficiary of any avoidance action will be unsecured creditors. Notably, preferences and fraudulent transfers can be brought under both applicable state law as well as under the US Bankruptcy Code and the particular requirements of each may vary (including the length of the statute of limitations). First, transfers on account of an antecedent debt (a debt that precedes the creation of the security interest) made within the 90 days prior to the bankruptcy filing when the debtor was insolvent are voidable as preferences if they permit the creditor to receive more than they 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 and there are a variety of statutory defences and safe harbours to preference claims. Exemptions do, of course, exist. For example, if the security interest in question is granted substantially con - temporaneously with the occurrence of the debt being secured and is perfected within 30 days of its creation, it is then generally exempt from attack as a preference.
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