I just received a copy of an article by James D. Pendergast, Senior Vice President and the General Counsel of the U.C.C. Division of the First American Corporation: Secured Real Estate Mezzanine Lending (with Form).
Mr. Pendergast proposes that a mezzanine lender have their borrower opt into Article 8 of the U.C.C. and have the equity interest in the borrower entity be certificated. This will have the pledge equity interest be a security for purposes of Article 8 and investment property for Article 9. Therefore control of the certificates will be the best method of perfection, trumping a perfection by filing a financing statement.
He also advocates having the borrower deliver an irrevocable proxy granting the lender the right to vote the pledged equity interest in all matters related to Article 8 of the U.C.C. This would be a defense against the borrower opting back out of Article 8. At a minimum, the organizational documents of the borrower should prohibit the borrower from opting-out of Article 8.
He further advocates having the mezzanine lender file a financing statement under Article 9 of the U.C.C. against the pledged equity interest. This would put a future lender on notice that there is an adverse claim against the borrower and prevent this future lender from trumping the mezzanine lender (if the borrower is up to some shenanigans).
As an employee of U.C.C. insurance company, he of course advocates that the mezzanine lender obtain U.C.C. insurance.
None of this should be new information to anyone who engages in mezzanine lending or borrowing. I liked Mr. Pendergast's approach of showing the pros and cons of each position. He also walks through the steps a sneaky borrower might take.