The mortgage borrowers and each of the mezzanine borrowers defaulted at the common maturity of their respective loans. The mortgage lender and the various mezzanine lenders had entered into an intercreditor agreement among themselves. Two affiliates of Colony Capital owned the debt of the debtor, while a CDO managed by Gramercy Loan Services held the third and fourth level mezzanine loans. That is, the debtor was the borrower under a second level mezzanine loan. In Jameson, the debtor was 1) the direct parent of the most senior mezzanine borrower and the indirect parent of two mortgage borrowers (which were also the operating companies) and 2) the direct subsidiary of another mezzanine borrower and the indirect subsidiary of the most junior mezzanine borrower. In more complicated financings, there can be multiple levels of mezzanine loans, with each successive loan secured by a pledge of interests in successive levels of holding companies. Upon a default by the borrower, the mezzanine lender can foreclose on the pledged ownership interests in a matter of a few weeks, as opposed to the months or even years it can take to foreclose a mortgage (depending on the state in which the property is located). Mezzanine loans are similar to second mortgages, with the major difference being that a mezzanine loan is secured by a pledge of the equity in the entity that owns the real property, instead of a subordinate mortgage or deed of trust encumbering the actual real estate. Mezzanine loans are common in large commercial real estate financings. Ultimately, however, whether the Jameson decision will be limited to intercreditor disputes has yet to be determined. The Jameson decision is significant because it may limit the ability of both mezzanine borrowers and mezzanine lenders to utilize the threat of bankruptcy as a negotiation tactic when dealing with other parties in a capital structure. Of the debtor to file the petition with the intent of hindering a senior mezzanine lender’s foreclosure efforts and without any valid reorganization purpose. 1 In In re JER/Jameson Mezz Borrower II, LLC, The Court found that the debtor’s petition had been filed in bad faith because, among other things, a junior mezzanine lender had directed the sole non-independent director The United States Bankruptcy Court for the District of Delaware (the Court) recently granted a motion to dismiss a mezzanine borrower’s chapter 11 bankruptcy petition at the outset of the debtor’s case.
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