Matt Teich focuses his practice on transactional matters including finance, commercial real estate and corporate matters.
Matt represents institutional lenders and corporate clients in connection with a variety of complex commercial lending transactions including mortgage loans, asset based loans, construction loans, participations, mezzanine loans, debt restructurings, workouts and derivative transactions. His practice also includes commercial real estate development, acquisitions and leasing transactions. In addition, Matt provides counsel to corporate and commercial enterprises on a wide range of matters related to their specific business goals and day-to-day affairs, including commercial contract drafting and negotiation, corporate governance, asset and stock acquisitions, capital formation and private placements.
Matt has written articles for the New England Real Estate Journal on topics such as treatment of assignments of leases and rents in bankruptcy, modifications to mortgages held in real estate mortgage investment conduits, and judicial interpretation of construction loan provisions. Matt joined Halloran & Sage as a Summer Associate in 2008. In law school, he was a member of the New England Law Review.
Teich Explains Special Purpose Entities and the Limits of Bankruptcy Remoteness
New England Real Estate Journal, 05/20/2011
Special purpose entities (SPEs) are commonly used by commercial real estate borrowers to obtain favorable financing from lenders. Borrowers owning multiple projects will often create separate project-level SPEs, each set up to own a single project as its sole asset. The organizational documents of each SPE typically contain specific provisions requiring that it maintain a separate legal existence from the parent and affiliates. By virtue of being structured this way, the performance of each individual project-level SPE stands by itself and is unaffected by the financial affairs of the parent company or other projects held by affiliates. Each SPE is thus said to be bankruptcy remote. For these reasons, the single asset SPE structure is particularly comforting to lenders providing financing to a specific project or property. However, as recent case law suggests, there are limits to the concept of bankruptcy remoteness.
In the Chapter 11 case of In re General Growth Properties, Inc. et. al. (2009), the U.S. Bankruptcy Court for the Southern District of New York considered claims by several creditors of bad faith filings by approximately 750 single asset SPE debtors wholly owned by General Growth Properties, Inc. At the time of the petitions, some of the debtors were meeting their credit obligations while others had defaulted. The creditors argued that the single asset SPE structure required that each individual debtor consider only its own financial affairs in deciding whether to file and that many of the debtors were not in financial distress. The court found, however, that it was appropriate for the debtors to consider the interests of the entire company in addition to their own. The court noted in particular the fact that the independent managers of the debtors were permitted by their operating agreements and by Delaware corporate law to consider the interests of the entire company and its shareholders. Furthermore, although many of the loans to the individual debtors were not due to mature for several years, based on the general state of the credit market serious uncertainty existed as to whether the company or the individual debtors would be able to refinance to meet those obligations. Thus, the court found that the debtors did not file in bad faith and acted appropriately in considering the interests of the entire company.
The General Growth case should serve as a warning to lenders that the use of the single asset SPE structure does not guaranty that an entity will be bankruptcy proof. Lenders are well advised to investigate the financial health of the parent company and affiliates in addition to the individual borrower. Lenders may also want to consider having the principals of the borrower either unconditionally guaranty payment or sign a so-called Bad Boy Guaranty. Bad Boy Guaranties are agreements that carve-out exceptions to non-recourse loans where personal liability of the borrower and its principals will be triggered. Included among the various non-recourse carve-outs is typically language triggering the personal liability of the borrower and principals upon the filling by the borrower of a bankruptcy petition. Although they may not prevent a bankruptcy, these agreements present a serious deterrent to any borrower contemplating bankruptcy.
Lenders should also pay particular attention to the borrower's organizational documents and the various interests management is obligated to consider. They should not assume, as apparently many of the lenders did in General Growth, that independent directors are necessarily obligated to consider only their interests. In order to ensure that their interests are adequately protected, lenders should evaluate the need for approval rights with respect to independent directors or express language in the organizational documents requiring consideration of their interests in certain situations. As evidenced by the recent decision of the U.S. Bankruptcy Appellate Panel for the Tenth Circuit in In Re DB Capital Holdings, LLC (2010), courts may even give effect to provisions in a borrower's organizational documents that prohibit the borrower from voluntarily filing for bankruptcy. However, lenders should be careful when demanding these provisions, as the court specifically declined to address whether such provisions would be enforceable where evidence of lender coercion is present.By:Matthew TeichDepartment of Treasury Provides Guidance on Modifying Mortgage Loans Held in a REMIC
New England Real Estate Journal, 10/16/2010
The U.S. Department of Treasury recently released guidance that will provide greater flexibility to servicers of commercial mortgage loans held by Real Estate Mortgage Investment Conduits (REMIC) in permitting modifications to certain mortgage loans without affecting the tax status of the REMIC.
REMICs have long been a popular vehicle for mortgage securitization because they are not generally subject to federal income tax liability provided that they satisfy specific requirements in the Internal Revenue Code. Among these requirements are restrictions on the types of modifications that can be made to mortgage loans pooled in a REMIC. If a significant modification is made to a mortgage loan, there will be a deemed exchange of the unmodified mortgage for the modified mortgage resulting in a 100% penalty tax on any net gain realized from the exchange. Such a modification may also disqualify the REMIC for tax exempt status, thereby subjecting it to federal corporate income tax. Many common mortgage modifications constitute a significant modification, including certain changes in yield, changes in the obligor, or deferrals of payment or maturity, which makes negotiating a mortgage loan modification a complicated and cumbersome process.
The Internal Revenue Code provides an exception whereby a modification will not be deemed significant if the modification is occasioned by default or a reasonably foreseeable default. Many participants in the commercial mortgage industry have established procedures that are capable of accurately assessing the likelihood of default with respect to any particular mortgage loan. Similarly, they can also determine whether a proposed loan modification will be sufficient to avoid default well in advance of its actual occurrence. Nevertheless, most REMIC servicers are still reluctant to find that a proposed modification is necessary to avoid a reasonably foreseeable default, unless the loan is not performing or default is imminent. This is because servicers typically owe both fiduciary and contractual duties to REMIC investors to maintain the REMIC's tax exempt status, which, after all, is the essential appeal of investing in a REMIC, and consequently they are hesitant to permit any modification that could potentially cause the IRS to challenge the tax status of the REMIC. As a result, many borrowers are unable to negotiate loan modifications in time to prevent default.
New guidance recently released by the Department of Treasury attempts to address some of these issues. The guidance offers greater detail regarding how REMIC servicers should weigh the risks of default when considering a proposed loan modification and specifically provides that even currently performing loans, in certain circumstances, can be modified without prompting an IRS challenge to the REMIC's tax status. After meeting the standard for a qualified loan, if the holder or servicer of the loan reasonably believes that there is a significant risk of default of the pre-modification loan upon maturity of the loan or at an earlier date, and that the modified loan presents a substantially reduced risk of default, the IRS will not challenge the tax status of the REMIC. This reasonable belief is to be based on the totality of the circumstances, and may include factors such as written factual representations from the issuer of the loan, how far in the future the potential default is expected to occur, and past performance of the loan. Further, the guidance establishes that there is no maximum time period for which default is not per se foreseeable, and that the holder or servicer may reasonably believe that there is a significant risk of default even if the loan is performing. The intention is that this guidance will provide greater flexibility to REMIC servicers in permitting borrowers to modify their loans in time to prevent default.
For anyone wishing to weigh in on the debate, the Department of Treasury has requested comments in anticipation of potentially releasing additional guidance, which can be submitted through November 14, 2009 pursuant to Notice 2009-79.
By: Matthew TeichTreatment of an Absolute Assignment of Rents in Bankruptcy
New England Real Estate Journal, 03/19/2010
As economic conditions force greater numbers of commercial real estate deals into distress situations, issues relating the respective rights of borrower's and lender's to control and use rents also increase. Control and use of cash flow generated by commercial real estate properties is central to any workout, restructure or enforcement activity.
In documenting commercial mortgage loans, lenders routinely take assignments of rents through the terms of the mortgage or by a separate assignment, or both. Lenders have long sought to characterize these assignments as being an absolute rather than merely collateral in nature. Under these absolute assignments, borrowers are granted a revocable license to collect and use rents, which is subject to termination upon default. Under this construct lenders can characterize borrower's interests in rent as being contingent prior to termination of the so-called license back, and non-existent after termination.
In bankruptcy, this construct can be crucial in determining whether rents are part of the debtor's bankruptcy estate. A court upholding the validity of an absolute assignment of rents allows the lender to assert ownership and control cash, and limits a debtor's ability to reorganize. Conversely, courts that view absolute assignments as really collateral assignments, require lender's to engage in some extensive enforcement activities to secure control of the rental stream.
A split of authority persists among states regarding the treatment of rents subject to an absolute assignment of rents in bankruptcy. Given that the borrower still retains a contingent interest in rents subject to an absolute assignment to the extent the debt is ever paid off, some states hold that they are better considered part of the borrower's bankruptcy estate. Connecticut and Massachusetts are two such states. In Cavros v. Fleet National Bank, the U.S. Bankruptcy Court for the District of Connecticut held that an assignment of rents purporting to convey the entire lessor's right, title and interests in all rents was in substance a mortgage because the borrower retained the power to divest the lender's interest through satisfaction of the mortgage debt. The court held that this equitable title or equity of redemption persisted until extinguished in a foreclosure action. Given the borrower's continuing interest in the rents, the court held that they were part of the borrower's bankruptcy estate. In Lyons v. Federal Savings Bank, the U.S. Bankruptcy Court for the District of Massachusetts similarly held that an assignment of rents purporting to unconditionally assign all rents constituted additional security, rather than absolute title, because the assignment was made conditional on the borrower's default and would terminate upon payment of the debt.
By contrast, New York and Vermont have recognized that an absolute assignment of rents can convey full title and accordingly have not included such rents in the borrower's bankruptcy estate. In In re Loco Realty Corp., the U.S. Bankruptcy Court for the Southern District of New York looked strictly at the language of the assignment which purported to absolutely and unconditionally assign all right, title and interest in all rents. Although the court acknowledged that the borrower had an interest in the rents to the extent the mortgage is ever satisfied, it held that until such time, the rents were not the borrower's property and were not to be included the borrower's bankruptcy estate. In In re Galvin, the U.S. Bankruptcy Court for the District of Vermont also looked to the language of the assignment and determined that it conveyed absolute title to lender and therefore that the rents were not part of the borrower's bankruptcy estate. Although the agreement provided that the rents were additional security, it also evidenced an intent . . . to establish an absolute transfer and assignment, which the court found more persuasive.
Although treatments of assignment of rent in bankruptcy varies state to state, mortgage lenders are still well advised to use the construct of an absolute assignment with a license back in documenting their transactions.Lenders - Include Specific Performance Milestones in Construction Loan Agreements
New England Real Estate Journal, 01/15/2010
On November 13, 2009, the New York State Supreme Court Appellate Division upheld a lower court decision granting an injunction requiring Citigroup Global Markets Realty Corp. (Citigroup) to continue funding what it believes to be a failing project. The so-called Destiny USA project consists of an extension to the Carousel Mall located in Syracuse, N.Y. and is designed to include development of a shopping, entertainment, dining and tourism center displaying the latest in modern green technology. In 2005, Citigroup contracted with Destiny USA Holdings, LLC (Destiny) to provide a $155 million construction loan to finance the project. The project was also funded with $40 million from Destiny and $170 million in bonds from the City of Syracuse Industrial Development Agency.
The project loan was structured as an advancing term loan, whereby Citigroup was charged with approving advances of all loan proceeds, regardless of their source, pursuant to monthly draw requests submitted by Destiny. If a Deficiency existed, as defined in the loan agreement, Citigroup had the authority to deny such a request. Although at times disputes existed, all draw requests were paid by Citigroup until May 2009 when Citigroup refused to fund further draw requests and subsequently sent Destiny a Deficiency notice alleging a Deficiency in excess of $15 million. Almost the entire amount of that Deficiency was based on the inclusion of Tenant Improvement costs in the Deficiency calculation. When Destiny failed to cure the alleged Deficiency, Citigroup declared the loan in default and thereafter Destiny sought an injunction to compel Citigroup to continue to make advances.
The dispute before the State of New York Supreme Court Appellate Division hinged on whether it was appropriate for Citigroup to include Tenant Improvement costs in its Deficiency calculation. The court began its analysis by examining the definition of Deficiency found in the loan agreement. Under the loan agreement, a Deficiency is to be measured, in relevant part, according to the amount by which the balance of the loan proceeds yet to be advanced plus other available funds, is less than the actual sum estimated to be required to complete construction of the Required Improvements in accordance with the Plans and Specifications. The parties both agreed that Tenant Improvements, which under the loan agreement refers to costs incurred in obtaining leases relative to the property, were not included as Required Improvements in any of the Plans and Specifications. Thus, the court held that under the plain language of the party's agreement, Tenant Improvements were not part of the Deficiency calculation and therefore Destiny had demonstrated a likelihood of success on the merits sufficient to permit the issuance of an injunction requiring Citigroup to continue to fund the project.
Citigroup had argued unsuccessfully in the lower court that the measure of a Deficiency was to be based on the entire budget concerning the project and further that it should not be required to fund a project it alleges to be a failure due to an alleged lack of committed tenants. The lower court held that the parties agreement, by its terms, did not include the existing budget as a consideration in calculating a Deficiency, nor did it contain any requirement that there be any committed tenants at this phase in the project. This time, Citigroup argued that although the Plans and Specifications submitted to the court did not include Tenant Improvement costs, as the project progressed, such costs inevitably would be included in subsequent revised Plans and Specifications. Further, Citigroup argued that such costs should implicitly be included as Required Improvements, otherwise the definition would only require the building of a core and a shell and not a shopping center and tourist destination. However, based on the plain language of the loan agreement and the Plans and Specifications on record, the court concluded that it could not read Tenant Improvement costs into the calculation of a Deficiency. Nonetheless, the court required Destiny to post a $15 million bond to reimburse Citibank for damages in the event it may be later determined that the injunction should not have been issued.
This case serves as an important reminder to lenders of the need to include specific performance milestones in construction loan agreements to protect against the danger of being trapped funding a potentially failing project. As this case demonstrates, courts may not be willing to imply such terms in a loan agreement, even if, logically speaking, they may have been part of a party's basic understanding of the basis of the bargain.
By: Matthew Teich
News & Events
Business Transactions Group Year-End Transactions
The Halloran & Sage Business Transactions Group, led by partners Robert Cox and James Maher, has further cemented its status as a leader in the Greater Hartford and Greater New Haven business communities through its efficient and expert execution of an unprecedented level of diverse and complex transactions at the end of 2012.
Bob and Jim worked closely with associates Jaimee Newman, Matthew Teich and Casey O'Connell, along with legal assistants Karel Ortolani and Olivia Albanese, to close over twenty corporate and commercial transactions in December, 2012, showcasing the Halloran & Sage Business Group's proven ability to meet aggressive deadlines and produce high quality work for clients while matching up with other leading regional and national law firms. The buzz surrounding the Group's 2012 success has the firm and its business clients excited to tackle the numerous new projects that are already underway in 2013.
The diversity of the Halloran & Sage Business Group's 2012 year-end transactions, along with the sheer volume of closings, illustrates the Group's capacity to effectively represent its clients' varied needs. These transactions included business and real estate acquisitions and divestitures, strategic alliance agreements, stock redemptions, a medical office building/cancer center development, tax-driven mergers and dissolutions, business and acquisition financing, health care financing, corporate financing and loan restructures, corporate governance/gifting matters and incentive compensation/employment matters.
Bob and Jim believe that the rising profile of the Halloran & Sage Business Group in both Hartford and New Haven is being defined as the Group closes out 2012 and begins to tackle new challenges in 2013. The Group is thankful to be thriving in this challenging environment and believes that its clients are sensing a building momentum. While the strength of the corporate and commercial market remains uncertain, the volume and diversity of the Halloran & Sage Business Group's year-end transactions is a testament to its clients' belief and reliance on the professionalism and responsiveness of the Group to provide the services they need when they need them.
Business Transactions Group members have increased their involvement in major business organizations, including both the MetroHartford Alliance and the Greater New Haven Chamber of Commerce. As a Strategic Partner level-member at the MetroHartford Alliance, they are keeping abreast of economic developments in the Hartford region and also participating in the newly launched Connecticut Health Council. In New Haven, they are participating in the New Haven Chamber sponsored Regional Leadership Council which addresses the major economic and legislative issues in the region. Halloran & Sage is also pleased to be involved in a new statewide program co-sponsored by The Hartford Business Journal and the CBIA which will honor family owned businesses later this year.H & S Welcomes Summer Associates
Halloran & Sage is pleased to announce that six law students have joined the firm for the 2008 Summer Associate Program. Allison Cantor, Susan Kirkeby and Gwaina Wauldon are law students at the University of Connecticut School of Law. Meg Reid is a law Student at Villanova University School of Law and Matthew Teich is a law student at the New England School of Law. Summer associates work in a variety of the firm's departments gaining experience in several practice areas.
The firm's Summer Associate program provides an oppourtunity for law students to work in a legal environment and gain practical legal experience and exposure to law firm practice. Our goal is to provide our summer associates with valuable and meaningful practical legal experience and at the same time give them a realistic picture of law firm life. Our firm practices law at the highest level and we have selected summer associates that are able to work up to those standards, said Jeffrey Gostyla, a partner with the firm who coordinates the Summer Program.
Halloran & Sage is a full service law firm with offices in Hartford, Middletown, and Westport, Connecticut, and a branch in Washington, DC. Founded in 1935, the Firm's client base ranges from Fortune 500 companies to closely held businesses, institutional and private investor, governmental units, public and private universities, and other non-profit organizations.