In a significant ruling that helps define the rights of mezzanine lenders in a structured finance transaction, a federal judge in Arizona agreed with a team of Ballard Spahr attorneys and prevented the proposed sale of a major luxury resort in Tucson.

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. The ruling thwarted a common strategy in which mezzanine lenders use a Uniform Commercial Code sale of ownership interests to obtain control of a property owner and steer the property toward bankruptcy. 

The case involved 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 the resort into bankruptcy, preventing the Senior Loan foreclosure.

But the Ballard Spahr attorneys, who represented the senior lender, argued that a UCC sale of the Starr Pass ownership interest without repayment of the Senior Loan would violate several key provisions of the Intercreditor Agreement. They also argued that the senior lender would lose millions if the value of the resort was written down during a bankruptcy or loan renegotiation. U.S. District Judge David C. Bury agreed, preventing the mezzanine lender’s proposed UCC sale until the matured first mortgage loan of $145 million is satisfied in full.