A party seeking to invoke the secured creditor exemption has the burden of establishing its entitlement to the exemption. For a secured lender to preserve the exemption, it must not have “participated in management” of the facility prior to foreclosure, and must divest itself of the property at the earliest practicable, commercially reasonable time, on commercially reasonable terms, taking into account market conditions and legal and regulatory requirements.
Only a handful of courts have analyzed a secured lender’s activities to determine whether it had lost the protections of the secured creditor exemption. As these cases illustrate, the inquiry into the exemption is very factual specific. For instance, in United States v. Mirabile, the court denied a bank’s motion for summary judgment that it had not participated in management based upon evidence that a loan officer was “always” present at the site, perhaps visiting it once a week. In addition, there was evidence that the bank required the borrower to accept the day-to-day supervision if it wanted to continue operations with bank funds. The loan officer purportedly also came to the site frequently and insisted on certain manufacturing changes and reassignment of personnel.
In United States v. Pesses, the exemption was found not to be available to a lender that took control of the property post-foreclosure for over two years, took over responsibility for security of the property, hired people to clean up the plant and perform maintenance tasks, received assigned rent payments from the local development authority, and made arrangements to lease part of the facility to a new lessee when the debtor defaulted.
In addition, in XDP, Inc. v. Watumull Properties Corp., the court held that based upon the totality of the facts, there was a question of fact as to whether the lender was merely protecting its security interest or actively involved in the management of the facility after it acquired the property.
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