By: Deborah Thaxter
Nixon Peabody LLP
IPED – Boston, MA
November 20-21, 2008
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LITIGATION ANALYSIS IS CRITICAL TO YOUR
WORKOUT OR DISPOSITION PLAN
(The word “Sues” is not a forbidden four letter word) $#!$#!
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Know your rights and your leverage
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Marshall your troops at the border
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Choose your forum – If you don’t, they will
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You cannot escape – litigation is everywhere
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WHEN THE LP AND GP HAVE
DIFFERENT DISPOSITION STRATEGIES
WHEN THE LP WANTS TO SELL AND
GP SAYS NO WAY
• Specific Exit Provision
– Timing issue
– Right of First Refusal
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WHEN THE LP WANTS TO SELL AND
GP SAYS NO WAY (cont.)
• Dissolution Provisions
– State Law Requirements
– Impact on the Waterfall
– What actually happens after dissolution
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WHEN THE LP WANTS TO SELL AND
GP SAYS NO WAY (Cont.)
• GP Removal Provisions
– With or Without Cause
– Fiduciary Duties
– Forfeiture vs Push Aside
– Management Agent Removal
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WHEN THE LP WANTS TO SELL AND
GP SAYS NO WAY (Cont.)
• LP Right to Sell or Assign its LP Interest
– Threat of Unfriendly Third Party
– Assignment of Economic Benefits
– 13 to 18 Year Window
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WHEN THE LP WANTS TO SELL AND
GP SAYS NO WAY (Cont.)
• LP Leverage Based on Required Consent for
Refinancing
– Debt/Equity Conflict
– Negotiated Exit Language
– Prepayment Penalty Payback
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WHEN THE GP WANTS TO SELL AND
THE LP PREFERS STATUS QUO
• Unilateral Transfers
• Timing and Recapture Bonds
• Disclosure Obligations
– Fiduciary duties?
– Immediate flip in higher value
• Resyndications
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WHEN THE UPPER TIER INVESTORS
BECOME RESTLESS
• Public Funds
– Books and Records Request
– Threats to Proxy Contests
• Corporate Funds
– Recapture Risks
– Take Over of GP Syndicator Role
– Self-Dealing Concerns
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ARE YOU READY FOR A FIGHT?
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Where can the lawsuit be brought?
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Should you be first to the Courthouse?
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Do you own the moral high ground?
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Will it help or hurt your exit strategy?
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REVIEW PROJECT DOCUMENTS
KEY PARTNERSHIP PROVISIONS
• Removal of property manager
• Removal of GP
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Push aside or forfeiture
Cure period
Valuation of GP interest
Deferred Developer Fees
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REVIEW PROJECT DOCUMENTS
KEY PARTNERSHIP PROVISIONS (CONT.)
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Repurchase
GP Development and Operating Deficit Obligations
GP and Developer Guaranties
Adjusters
Venue and Jurisdiction
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KEY LOAN PROVISIONS
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Events of Default and Cure Period
Foreclosure Procedure
Guaranties
Consent required for change in General Partner and
property manager
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MARSHALL YOUR FORCES AND
TAKE CHARGE
AT CONSTRUCTION PHASE
• Problems
– GP Affiliated General Contractor with multiple projects
– Delays and Cost Overruns
– Failure to meet place in service date and loss of credits
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MARSHALL YOUR FORCES AND
TAKE CHARGE
AT CONSTRUCTION PHASE (CONT.)
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Protections
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Construction contract terminates with removal of affiliated G.P.
Payment and performance bonds
Subguard insurance products
Don’t leave construction draw monitoring to lender
Site visits
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MARSHALL YOUR FORCES AND
TAKE CHARGE
AT CONSTRUCTION PHASE (CONT.)
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Remedial Actions
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Exercise rights under payment and/or performance bonds
Remove and replace GP
Terminate construction contract
Work with local tax credit agencies to swap or secure
additional credits
– Repurchase demand
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MARSHALL YOUR FORCES AND
TAKE CHARGE
AFTER LEASE-UP
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Problems
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Low occupancy, negative cash flow and growing payables
Failure to pay debt service or property taxes
Deferred maintenance – low REAC Scores
The “gap” between construction and permanent loans
Misappropriation or co-mingling of funds
Compliance issues
Failure to provide yearly audited financials
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MARSHALL YOUR FORCES AND
TAKE CHARGE
AFTER LEASE-UP (CONT.)
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Protections
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Strong key partnership provisions
Properly documented advances
Properly documented demands for corrective behavior
Workout agreement and escrow of removal documents
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MARSHALL YOUR FORCES AND
TAKE CHARGE
• Remedial Actions
– Replace property manager
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Voluntary vs. involuntary removal
– Remove and Replace GP
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Has GP shown willingness to work with LP?
What are the grounds for an involuntary removal?
Push aside v. complete removal
Can the GP interest be sold to a new third party GP?
2530 red flag risk and who wants the liability?
– Send monetary demands to GP and Guarantors
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CHOOSE YOUR FORUM AND PICK YOUR
TIME
• Location of your business vs. location of property or
adversary
– State vs. Federal
– Use of Declaratory Judgment to pick forum
– Requests for injunctive relief – who goes first?
• Are the defaults substantial?
– Misappropriation of funds
– Risk of loss of credits due to failure to meet placed in
service date
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CHOOSE YOUR FORUM AND PICK YOUR
TIME
– Risk of Foreclosure
– Federal and state regulatory problems
– Failure to provide financial information
• Can your adversary afford to litigate
• GP/Developer claims
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Debt/equity conflict
Poor underwriting vs. poor management
Promises made to GP to step into existing project
Failure to fund equity advances
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CHOOSE YOUR FORUM AND PICK YOUR
TIME
• Upper tier investor pressure
– Greater investor scrutiny
– Recent investor lawsuits
– Use of upper tier reserves
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LITIGATION IS HERE TO STAY
• City vs. Property Partnerships
– Administrative proceeding to shut down property as a
public nuisance
– Court proceeding by sheriff to declare property a public
nuisance and to require extensive security improvements
• GP/GC vs. LP Sponsor/Syndicator
– Termination of construction contracts and lien filings
– Removals of GP and/or property manager
– Bankruptcy litigation over effect of removal of GP (358
B.R. 24)
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LITIGATION IS HERE TO STAY
– Third party suits against agencies, including against tax
credit authority that granted tax credit swap
– Recovery of and defense against monetary demands
against GPs and Guarantors
• Upper tier institutional investors vs. Syndicators
– Books and Records
– Removals of Syndicators as General Partners
– Exit strategy disputes over consents, back end splits and
recapture
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NEGOTIATING A WORK-OUT
AGREEMENT
• Does GP stay or go?
– How value GP interest?
– Does GP keep residual interest as SLP?
• Who Pays What to Whom
– GP fees
– GP loans – amount and priority
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NEGOTIATING A WORK-OUT
AGREEMENT (Cont’d)
– Capital contribution advances vs LP Loans
– Tax consequences of canceling developers fees
– Cash payments
• Remedy for Defaults under Workout Agreement
– Signed assignment and partnership amendment
documents in escrow
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NEGOTIATING A WORK-OUT
AGREEMENT (Cont’d)
– Forfeiture of fees
– Penalty payments
– Cross-collateralization and cross-default provisions
• Bankruptcy Proof Provisions
• Venue and Jurisdiction
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NEGOTIATING A WORK-OUT
AGREEMENT (Cont’d)
• Release
– General or limited in scope
– Time period covered
– Tax compliance carve-out
– Effect on guaranty of non-released party
– Representations as to liens, payables and claims
B10533214.1
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