1.  It appears there are the following scrivener's errors in the Intercreditor Agreement (HUD-92322-ORCF):

We agree.  The scrivener's errors have been corrected, and the corrected document will be posted soon.

2.  Can we add to paragraph 2.2(b) of the Intercreditor Agreement?

Section 2.2(b) (the AR Lender’s standstill clause) protects us from having the AR Lender utilize the FHA Lender Priority Collateral to exercise rights or remedies against AR lender’s second lien collateral without the FHA Lender’s consent.
 

3.  Do we need to add conflict language to the body of the Intercreditor Agreement? 

The ICA is the only agreement between the AR Lender and the FHA Lender, and the purpose of this document is to sort out lien priority.  If either lender has a conflicting or inconsistent agreement with other parties, that is ok.  The ICA is the agreement between the two lenders, and it is the entire agreement between the two lenders.

4.  The Intercreditor Agreement (HUD-92322-ORCF) contains the following provisions related to governing law and jurisdiction:

Paragraph 1:  “All terms used herein which are not specifically defined shall have the meanings provided in Article 9 of the Uniform Commercial Code as in effect in the State of (Insert property jurisdiction) ________ from time to time (the ‘UCC’).”

Paragraph 1.9:  “’Business Day’ shall mean any day other than a Saturday, a Sunday, or any day that banks in [insert Bank’s Jurisdiction] _________________ or [insert Property Jurisdiction if different from Bank’s Jurisdiction] _______________ are required or permitted by law to close.”

Paragraph 4.9:  “This Agreement and all matters arising out of or related to this Agreement shall be deemed to have been made under, and shall be governed and construed in all respects by, the substantive laws of the State of [enter property or organizational jurisdiction] _________ without regard to principles of conflicts of laws.”

Paragraph 4.10:  “FHA Lender and AR Lender hereby irrevocably consent to the nonexclusive jurisdiction of the State and Federal Courts located in the State of [enter property or organizational jurisdiction] _________ in any and all actions and proceedings arising under or in connection with this Agreement.”

I’m working on a transaction where the AR Lender inserted the AR Lender’s jurisdiction, which is different from the property or organizational jurisdiction, into each of the blanks above.  Is this acceptable?

No, the AR Lender may not insert its jurisdiction into any of the blanks above when that jurisdiction differs from the property jurisdiction or organizational jurisdiction.  In each of the paragraphs referenced in the question, the parties must comply with the bracketed instructions when selecting the governing law and venue. 
While reviewing this inquiry, the Implementation Committee discovered a potential conflict between the Intercreditor Agreement (ICA) and the Operator’s Attorney’s Opinion (HUD-92325-ORCF).  Paragraph MM of the Opinion provides the following:  "Each of the Operator HUD Documents is governed by the laws of the Property Jurisdiction and the laws of the United States of America."  The term "Operator HUD Documents" includes the ICA; thus, the Opinion requires the attorney to state that the ICA is governed by the law of the Property Jurisdiction even though paragraph 4.9 of the ICA allows the parties to choose either the Property Jurisdiction or the Organizational Jurisdiction.  If the parties to the ICA choose the Organizational Jurisdiction as the governing law, paragraph MM of the Opinion may be modified as follows:  "Each of the Operator HUD Documents is governed by the laws of the Property Jurisdiction (except the Intercreditor, which is governed by the laws of the Organizational Jurisdiction) and the laws of the United States of America."  The form on hudclips will be updated to include this optional language.    

5.  Section 1.7 of the new Intercreditor Agreement (HUD-92322-ORCF) contemplates that the AR Lender may request that additional obligations be included in the definition of “AR Loan Obligations” (and therefore enjoy first lien status).  If ORCF denies such a request, does the committee think it appropriate to document this denial in Section 1.7?  If the denial is not documented, the concern is that, in a dispute down the road, AR Lender may contend that such obligation falls within the parameters of the definition of AR Loan Obligations, since such definition is broad and lends itself to interpretation.  The parties originally involved in the denial may no longer be around, and will be relying on the language in the agreements themselves. 

No, the definition of “AR Loan Obligations” in Section 1.7 of the Intercreditor Agreement should not describe requests for expansion of the definition that HUD denied.  The definition deliberately captures the broad range of operator requirements under the AR Loan Documents, but also excludes obligations “that are not directly related to the benefit of the Facilities or the Other Facilities, or the financing thereof.”  Whether a requirement comes from the AR Loan Documents or benefits the Facilities may be debatable in some situations, but HUD does not anticipate the definition of “AR Loan Obligations” to be a source of frequent post-closing disagreement between the parties to the Intercreditor.  In the interest of keeping the closing process as lean as possible, the definition should only be expanded to include obligations that HUD has approved. 

6.  Section 1.9 of the Intercreditor provides that “Business Day” shall mean any day other than a Saturday, a Sunday, or any day that banks in [insert Bank’s Jurisdiction] _________________ or [insert Property Jurisdiction if different from Bank’s Jurisdiction] _______________ are required or permitted by law to close.

The question is, what is meant by “Bank”, where it directs you to insert “Bank’s jurisdiction”?  The term “Bank” is not a defined term in the document.  AR lenders are sometimes banks, but frequently they are not, and in any event the defined term for the AR lender is AR Lender.   A FAQ dated 7/19/13 had suggested that: “In Section 1.8, references to Bank should be changed to AR Lender”.  By contrast, another FAQ dated 4/2/15 listed a number of jurisdictional provisions in the ICA, including the Business Day definition now found in Section 1.9, and asked if AR Lender could insert its own jurisdiction, if it differed from the property or organizational jurisdiction.   This time, the committee responded “ No, the AR Lender may not insert its jurisdiction into any of the blanks above when that jurisdiction differs from the property jurisdiction or organizational jurisdiction.  In each of the paragraphs referenced in the question, the parties must comply with the bracketed instructions when selecting the governing law and venue.”

Accordingly, we are still confused as to what our bracketed instructions mean in this definition, since they refer to “Bank’s jurisdiction”. .  The term “jurisdiction” in this definition is used in a different way than in other clauses that refer to jurisdiction; i.e. it does NOT control what law governs, etc., but is used in the document as summarized below.     Based on the below uses of the term, I suspect that the term Bank in this definition was intended to refer to AR Lender’s jurisdiction; i.e. banks where AR lender is located.  Please advise.   

In Section 1.9 of the Intercreditor Agreement, references to Bank should be changed to AR Lender, as indicated in the 7/19/13 FAQ.  The form on Hudclips will be updated to correct this scrivener’s error.  In the meantime, please make the change manually.  The Committee will also revise the 4/2/15 FAQ to be consistent with the 7/19/13 FAQ.  Thank you for bringing the discrepancy to our attention. 

7.  Under Section 3.6 of the new Intercreditor, AR lender and Operator certify that any cross-defaults have been disclosed to HUD and approved in writing.   ORCF has determined to document approved cross-defaults in 2.7(g) of the ICA.

If ORCF disapproves a request for approval of a cross-default, should such disapproval be inserted into Section 2.7(g)? 

ICA doesn’t specify that failure to get approval means cross-default is not enforceable.  If the unapproved cross-default is not stricken from the AR loan documents, it will still be enforceable by AR lender against the Borrower.

Failure to disclose and get approval would represent a breach of a representation in the ICA for which we may have contractual remedies under the ICA, but at a minimum we’d have to prove that it was denied.  Otherwise, AR lenders may claim that HUD approved closing the AR loan with such cross-defaults in place.     

No, HUD’s disapproval of cross-default provisions in the AR loan documents should not be inserted into Section 2.7(g).  If HUD denies a request for approval of a cross-default provision, the AR Lender and Operator will be required to delete that provision from the relevant document.  As noted in the question, failure to disclose a cross-default provision (or delete a cross-default provision that HUD has not approved in writing) creates a breach of the Intercreditor Agreement for which HUD can seek contractual remedies.  AR lenders and operators should not assume that HUD’s failure to object to undisclosed cross-default provisions in the AR loan documents constitutes HUD approval of those provisions. 

8.  I’m preparing to close a Section 232/223(f) transaction with AR Financing.  The parties have requested the following changes to paragraph 2.6 of the Intercreditor Agreement (HUD-92322-ORCF):

   (a)  AR Lender agrees that, upon the AR Loan Obligations being Paid in Full, any AR Lender Priority Collateral and the proceeds thereof which may come into AR Lender’s possession will, to the extent that FHA Lender is otherwise entitled thereto in accordance with the FHA-Insured Loan Documents and/or applicable law, be held by it in trust for FHA Lender and it shall turn over any such AR Lender Priority Collateral and/or proceeds thereof to FHA Lender . . . .
(b)  FHA Lender agrees that upon the FHA-Insured Loan Obligations being Paid in Full . . . any FHA Lender Priority Collateral securing the AR Loan Obligations and proceeds thereof, which may come into FHA Lender’s possession, will, to the extent that AR Lender is otherwise entitled thereto in accordance with the AR Loan Documents and/or applicable law, be held by it in trust for AR Lender and it shall turn over any such FHA Lender Priority Collateral and/or proceeds thereof to AR Lender . . . .

Are these changes legally acceptable?  

Yes; the language was inadvertently omitted during the PRA process. The requested language is taken verbatim from paragraph 2.5 and will make paragraph 2.6 consistent with paragraph 2.5 as intended.  If a lender requests the change, you are authorized to approve the request.  We will make a formal change to the document during the next PRA review process.