Special Member, Independent Manager, Springing Member, Independent Director or Independent Member Services
Special member, independent manager, springing member, independent director or independent member (Special Member) services provide bankruptcy remoteness for the benefit of a lender. Accruit’s subsidiaries have been providing Special Member services for over 15 years.
More specifically, lenders when making real estate loans, always have a first mortgage on the property and in the event of a borrower default, as a secured party, the lender does not risk losing its security interest or position, but the mere process of the lender being subject to the bankruptcy proceedings can impede the lender’s efforts to take the property back. These loans are typically extended to a new special purpose entity (SPE) LLC created by the borrower to hold title to the property.
Some time ago, lawyers for borrowers and lenders came up with an idea to make it impossible for this type of SPE LLC to go into bankruptcy. The solution was simple. The solution was to modify the operating agreement for the LLC and provide that the members and/or manager could do whatever they wanted to, but per the terms of the operating agreement, for the action of submitting the LLC to bankruptcy, then a separate party inserted in the operating agreement, a Special Member, would have to affirmatively agree to the bankruptcy. The operating agreement provided that the Special Member would agree up front not to allow the property to go in bankruptcy—in effect, a negative pledge.
This practice first started in the commercial mortgage backed securities market. These securities would be rated by agencies like S&P and it was found that those loans, which had this bankruptcy remote feature, were more favorably rated. Soon after, conventional institutional lenders, such as large insurance companies and pension funds, determined that their loans would also be best served if they also had a bankruptcy remote nature.