In a ruling that helps define the rights of mezzanine lenders in a structured finance transaction, a federal judge in Arizona blocked the proposed UCC sale of ownership interests in the limited liability company that owns a resort in Tucson until the matured first mortgage loan of $145 million is satisfied in full.

The decision in U.S. Bank National Association, Trustee v. RFC CDO 2006-1 Ltd. is important because it interprets the rights of a mezzanine lender pursuant to a widely used form of Intercreditor Agreement and blocks a common strategy in which mezzanine lenders use the process of a UCC sale of ownership interests to obtain control of a property owner and steer a property toward bankruptcy. It appears to be the first such ruling by a federal district court.

The case involved a resort owner, Starr Pass Resort Developments LLC (Starr Pass), which borrowed $145 million secured by, among other things, a first lien deed of trust on the subject project (the Senior Loan). The owners of Starr Pass also had borrowed $20 million secured by a pledge of 100 percent of the ownership interest in Starr Pass (the Mezzanine Loan). Ultimately, the Senior Loan matured and became due and payable in full and the senior lender scheduled a foreclosure sale.

The mezzanine lender then scheduled a UCC auction sale to occur prior to the scheduled Senior Loan foreclosure sale. The expectation was that the mezzanine lender would gain control of Starr Pass following the UCC auction sale and likely put Starr Pass into bankruptcy, blocking the Senior Loan foreclosure.

A team of Ballard Spahr attorneys, representing the senior lender, argued that the mezzanine lender’s attempt to force a UCC sale of the Starr Pass ownership interest without repayment of the matured Senior Loan would violate several key provisions of the applicable Intercreditor Agreement. They contended that such violations would result in the senior lender potentially losing millions during either a bankruptcy “cram down” action or renegotiation of the Senior Loan.

According to Ballard Spahr attorney Timothy F. McCormack, disputes between senior and mezzanine lenders often are decided on an interpretation of the applicable Intercreditor Agreement and its underlying facts. In the Starr Pass matter, U.S. District Judge David C. Bury found that the “clear and express contract terms” in the Intercreditor Agreement supported the senior lender’s position requiring the mezzanine lender to cure all defaults in the Senior Loan as a condition precedent to enforcing its remedies.

Ballard Spahr’s Commercial Real Estate Recovery Group has extensive experience in the origination, structuring, restructuring, and enforcement of real estate debt and equity investments involving senior secured, A/B, syndicated, and mezzanine loans; joint venture and preferred equity investments; and the myriad intercreditor issues that these transactions often raise. Regardless of the nature of the investment or where it may be in the capital stack, Ballard Spahr attorneys are able to structure, restructure, and unwind the most challenging of real estate investments.

For further information on the Starr Pass case, please contact Timothy F. McCormack at 410.528.5680 or, Jeffrey S. Pitcher at 602.798.5462 or, Brian Schulman at 602.798.5407 or, or Dean C. Waldt at 602.798.5480 or



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