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Lender Liability: Defending Against Attacks
on Loans in Workout, Modification,
Default and Bankruptcy Lessons From Recent Financial Litigation and Best Practices for Evaluating and Minimizing Claims
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TUESDAY, APRIL 21, 2015
Presenting a live 90-minute webinar with interactive Q&A
Richard Donovan, Member, Rose Law Firm, Little Rock, Ark.
Zachary G. Newman, Partner, Hahn & Hessen, New York
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FOR LIVE EVENT ONLY
April 21, 2015
LENDER LIABILITY:
DEFENDING AGAINST ATTACKS ON
LOANS IN WORKOUT, MODIFICATION,
DEFAULT AND BANKRUPTCY
LESSONS FROM RECENT FINANCIAL
LITIGATION AND BEST PRACTICES FOR
EVALUATING AND MINIMIZING CLAIMS
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This CLE live web seminar will analyze the most common types of lender liability claims, discuss how they are being asserted in various phases of the lending cycle and in bankruptcy, and explain lessons learned from recent financial litigation. The panel will outline best practices to minimize and avoid the risk of lender liability claims. Following the speaker presentations, you'll have an opportunity to get answers to your specific questions during the interactive Q&A.
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Your Moderator Zachary represents national banking associations, commercial lenders, leasing companies, and hedge funds in business litigation throughout the United States.
His practice focuses on
Banking Litigation (enforcing multi-million dollar credit facilities on behalf of national and regional banks and institutional and specialty lenders, securing provisional remedies, and defending lender liability litigation);
Commercial Litigation (litigating contract disputes, commercial insurance claims, aircraft lease disputes, unfair competition and restrictive covenants, bankruptcy disputes, and judgment enforcement); and
Fiduciary Litigation (contested accountings, Prudent Investor Act claims, and breach of fiduciary duty claims).
Fordham University School of Law (’94)
Co-Chair of the “Banking and Lender Liability Litigation Subcommittee” of the American Bar Association’s Commercial and Business Litigation Committee.
Co-Chair, Litigation Management Subcommittee of the America Bar Association Corporate Counsel Committee
New York Metro Area Super Lawyers 2011-present
212.478.7435 Znewman@
hahnhessen.com
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Best Lawyers in America - 2006-2014 Editions - Commercial Litigation; Bet-the-Company Litigation, Litigation - Banking & Finance, and Litigation – Securities Chambers USA Leading Lawyers, 2004-2013, Litigation: General Commercial Mid-South Super Lawyer Top 50 Lawyers in Arkansas, 2011-2013
Pulaski County, Arkansas, and American Bar Associations; Member, American Board of Trial Advocates; Master of the Bench, Henry Woods American Inn of Court; St. Thomas More Society, Member University of Arkansas, Bachelor of Arts, University of Arkansas, Juris Doctor (honors) Member, Arkansas Law Review
Guest Speaker
Richard Donovan
501.377.0325 rdonovan@
roselawfirm.com
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Banking, lending, financial services, and private equity have been subject to substantial criticism:
Websites (e.g., stopgreedybanks.com)
Courts
Borrowers
Editorials
Blogs
The current economic environment has created heightened tensions between lenders and borrowers
SCORECARD
HEADLINES
11
ELECTED & COURT OFFICIALS ARE NOT
RELUCTANT TO SPEAK THEIR MIND
Representative Barney Frank, Chair of House Financial Services Committee, recently had a “blunt” statement to Bankers:
“People really hate you, and they’re starting to hate us because we’re hanging out with you.”
http://www.politico.com/news/stories/0209/18372.html
In an Orange County mortgage modification case, Justice Catherine M. Bartlett cut off the bank lawyer who argued the proper documentation was not submitted and noted:
You, she said, are telling me lies … [The bank] got a bailout, and this is an outrage, how this man has been treated … Hard-working, middle-class Americans are trying to make it, trying to refinance with your bank … Either bank officials show up in person, or I’m going to order them here in handcuffs.
12
“HE MUST HAVE DONE IT BECAUSE THEY DID IT”
From A Recent Brief Filed By A Borrower
(A Lawyer, And A Former Bank Executive):
Through its acts and omissions, [the Bank] – like so
many mortgage lenders and other banks in recent
years – acted in bad faith and/or negligent manner to the
detriment of [us borrowers] ....
While courts in New York and elsewhere are holding
lenders accountable for such conduct, [the Bank]
nevertheless seeks to shield itself from the
consequences of its own actions ....
13
WHY THE RISE IN CLAIMS?
HERE ARE SOME CONTRIBUTING FACTORS
Rise in corporate defaults
Distressed loans
Secondary markets and assignments
Constriction of availability / deepening insolvency
Busy court dockets
Deep pockets become the focus
The plaintiff’s bar
Club deals - participations - syndicated loans
Underwriting criteria
Health of the loan documents
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LAWYER ADVERTISING AND
BORROWERS FLEXING THEIR MUSCLES
Google Answers Post:
I am looking for examples of borrowers who have
(successfully) sued banks for issuing them a highly risky loan.
I'd appreciate any pointers to U.S. legal precedence for action
taken against a bank for giving someone a risky loan. http://answers.google.com/answers/threadview?id=531128
Times Magazine:
Do banks, those powerful and wise institutions, sometimes
behave like bullies? While quite a few borrowers would say yes,
U.S. banks have long seemed virtually immune to retaliation for
heavy-handed tactics. Now, however, hundreds of borrowers
are taking their lenders to court and winning. http://www.time.com/time/magazine/article/0,9171,967374,00.html
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THE STIGMA OF AFFIRMATIVELY
ACKNOWLEDGING A DEBT IS NON-EXISTENT
Danny Tarkanian, a U.S. Senate candidate, filed suit
against La Jolla Bank in Las Vegas seeking to avoid a
debt noting:
“It’s something happening quite a bit in this
environment … Unfortunately, we’re caught in the
middle of it.”
http://www.lasvegassun.com/news/2010/jan/22/tarkanian-family-sues-bank-avoid-propertys-
foreclo/
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SERIOUS RISKS OF LENDER LIABILITY
Delay in recovery
Increased legal fees
More extensive discovery required
Imposition of counterparty legal fees
Recharacterization of debt
Equitable subordination
Cancellation of debt
Compensatory damages (lost profits – speculative)
Reputational damage (fraudulent and predatory lending claims)
Client resources (witnesses; document production; electronic discovery; in-house counsel)
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NOT A MATTER OF WINNING VS. LOSING:
MEASURE SUCCESS IN TERMS OF DELAYS
TSL (USA) Inc et al v. OppenheimerFunds Inc et al, New York State Supreme Court,
New York County, No. 600976/2010
On the other hand, it may be difficult for a lender to recover if they lend funds under circumstances in which they are found to have been without all material facts.
The lenders alleged that Oppenheimer breached its duty under a certain administration agreement by failing to notify them of four amortization events that occurred as a result of non-conforming securities purchases, and two additional events when expenses exceeded revenue for certain transactions.
The lenders claimed they continued lending without being told of the events,
and they could have terminated funding. The judge dismissed the fraudulent inducement claim with prejudice. No damages. The portfolio is performing and the theory of recovering loans lent is simply too speculative.
Court acknowledged that the specific performance claim could be replead to
permit the lenders to claim Oppenheimer is obligated to replace the non-conforming securities with conforming securities.
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TRENDING …
Loan commitment and failing to lend
Conduct, waivers & modifications
Good-faith and fair dealing
Exercise of control
Declaring defaults & loan modifications
Dealing with collateral
And more …
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INTRO TO TERM SHEETS AND LETTERS OF INTENT
Clearly Identify Binding v. Non-Binding Obligations Agreeing to Negotiate?
Use Separate Sheets for Binding and Non-Binding Terms
Specific Terms v. Ranges
Be Careful Using Phrases “I Agree” or “I will fund the loan if”
Clearly spell out conditions to funding
Conduct Matters Context of Statements
Be Consistent in Statements to Borrowers
Partial Performance?
Industry Custom?
Liability for Costs & Expenses
KEEP IT SIMPLE
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REVIEW ALL CONDUCT & COMMUNICATIONS TO DIVINE THE TRUE NATURE
AND SCOPE OF THE AGREEMENT
Actions can speak louder than words Can negotiated protections under loan agreements be waived by lenders’
course of conduct with borrowers? Common Sense Rules:
1. Include express reservation of rights language in all written correspondence with borrowers.
2. Avoid informal modifications or waivers of agreement’s terms. 3. Include “no oral” waiver language in agreements and amendments. 4. Include settlement language in all documents and communications
reflecting negotiations. a) “Submitted in furtherance of settlement negotiations” b) Subject to FRE 408 / Inadmissible in Court”
5. Refrain from editorializing in internal documentation or correspondence with the borrower.
6. Put everything in writing! But be mindful that whatever is put in writing may end up in court even if the lender believes it is protected.
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THE INITIAL LOAN DOCUMENTS PROVIDE A ROAD
MAP FOR THE UNDERLYING LOAN TRANSACTION
If a lender deviates from its commitment after it has been accepted by the borrower, then the possibility for lender liability claims arises. What if underwriting and due diligence documents demonstrate that a
covenant is unattainable?
Failing to fund will be inevitably challenged by the borrower in a
subsequent proceeding. Defaults can be many shades of gray.
If a borrower acts in reliance on a bank officer’s oral promise to make a
loan, equity may intervene to protect the borrower. What about oral modification clauses?
Issuance of a commitment letter or term sheet may require a lender to
pursue negotiations in good faith, even if market conditions have declined. Why can’t the lender simply shut down the negotiations?
24
DEVELOPING ENFORCEMENT AND LIQUIDATION PLANS
Where to Enforce: Forum Selection Clauses What Country? What Court? State or Federal?
Where and How Can You Serve Legal Papers, and Who Must Get Them? Agents Registered Mail?
Upon Default, What Are Your Rights? Right to Hold Collateral While Suing On Debt? Duty to Take Possession of Collateral? Right to Break and Enter? Consent to Immediate Attachment/Replevin even if counterclaims/defenses to
debt?
Waivers? What is Commercially Reasonable?
Private v. Public Sale? Notice obligations? Where Must Notice Be Given? Newspaper? Trade Journal?
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LENDERS’ EXERCISE OF TECHNICAL, FINANCIAL, AND NON-PAYMENT DEFAULTS?
The “material adverse change” clause.
The MAC clause at issue provided that Wachovia may terminate the LCA if there is material adverse change in the capital, banking and financial market conditions that could impair the sale of the loan by Lender as contemplated in the term sheet.
Clear or not? Ambiguous or designed?
The issue typically becomes whether MACs apply only to unforeseeable events, or foreseeable events.
In Capitol Justice LLC v. Wachovia Bank, N.A., (D. D.C. 2009), the court said ambiguous because there is more than one interpretation that a reasonable person could assign to the MAC when viewing the contract in the context and circumstances surrounding the agreement.
26
FRAUD BY OMISSION – YOU FOUND WHAT IN OUR FILES?
PNC argues that Counter Plaintiffs have not, and cannot, do so because, among other things, a lender has no duty to a borrower to disclose information, such as an appraisal, and the borrower has no right to rely upon the lender's appraisal.
PNC's argument overlooks another line of authority in Florida law that suggests that, under certain circumstances, a lender may have a duty to disclose information to a borrower.
Citing the Florida Supreme Court’s ruling in Barnett Bank of W. Fla. v. Hooper, 498 So.2d 923, 925 (Fla. 1986):
[W]here a bank becomes involved in a transaction with a customer with whom it has established a relationship of trust and confidence, and it is a transaction from which the bank is likely to benefit at the customer's expense, the bank may be found to have assumed a duty to disclose facts material to the transaction, peculiarly within its knowledge, and not otherwise available to the customer.
PNC Bank, N.A. v. Lucmaur, LLC (M.D. Fla. 2014)
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LOAN MODIFICATIONS IN CALIFORNIA
Jolley v. Chase Home Finance, LLC, 213 Cal. App. 4th 872, 153 Cal. Rptr. 3d 546 (Cal. App. 1st Dist. 2013)
Modified an entire body of case law by holding that whether a lender can be liable for negligence is a question of fact. Thus, summary judgment is not necessarily available to easily
dispose a disgruntled borrower’s negligence claims
Chase’s statements to the borrower that the requested modification was “highly probable,” “likely” and “look[ed] good” were not just opinion, and could be fraudulent.
The court: “[T]he world [has been] dramatically rocked in the past few years by lending practices colored by short-sighted self-interest”
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NOT ALL COURTS ARE HAPPY ABOUT JOLLEY
We disagree with Jolley to the extent it suggests a residential lender owes a common law duty of care to offer, consider, or approve a loan modification, or to explore and offer foreclosure
alternatives.
Lueras v. BAC Home Loans Servicing, LP, 221 Cal. App. 4th 49 (Cal. App. 4th Dist. 2013)
Jolley does not appear to be the majority rule. Courts routinely dismiss negligent
misrepresentation claims based on promises or predictions regarding the future. See, e.g., Ehlert v. Am.'s Servicing Co., 2011 WL 4862426, at *6 (S.D. Cal. Oct. 12,
2011) (dismissing negligent misrepresentation claim alleging loan servicer promised mortgagor would receive a modification after making trial payments); Moreno v. Wells
Fargo Home Mortg., 2011 WL 1375687, at *3 (S.D. Cal. Apr. 12, 2011) (dismissing negligent misrepresentation claim where loan servicer promised to try to help
mortgagor keep home).
McLaughlin v. Aurora Loan Servs., LLC, 2014 U.S. Dist. LEXIS 62142, 19-20 (C.D. Cal. Apr. 28, 2014)
29
CALIFORNIA AGAIN? WHY IT SEEMINGLY DESPISES THE PAROL EVIDENCE RULE
Riverisland v. Fresno-Madera Credit Assn. (Ca. 2013)
Plaintiff filed an action for fraud and negligent misrepresentation, alleging that the bank’s vice-president orally promised that the loan extension would be for two years and only required two additional property as additional collateral.
Abrogated California case law from 1935, regarding evidence offered to prove fraud for purposes of the parol evidence rule.
Affirmed reversal of summary judgment for defendant.
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FLORIDA WEIGHS IN ON
NEGLIGENT MISREPRESENTATION
In Dixon v. Countrywide Home Loans, Inc., 710 F. Supp. 2d 1325 (S.D. Fla. 2010), the borrower argued the lender promised different financing terms from those included in the loan documents. The court barred the claim under the Banking Statute of Frauds. Furthermore, the borrower could not establish reasonable reliance when the purported misrepresentation is contradicted by the express terms of the signed loan documents.
In Coral Reef Drive Land Development, LLC v. Duke Realty Limited Partnership, 45 So. 3d 897 (Fla. 3d DCA 2010),
the Third District stated that “[t]he world of commercial real estate is not a warm and fuzzy place. That is why parties to substantial transactions consult counsel and prepare highly-detailed written agreements to address every contingency the parties and counsel can imagine.”
31
INCREASE IN CASES LEADS TO INCONSISTENT
RULINGS AND INABILITY TO PREDICT OUTCOMES
Spaulding v. Wells Fargo Bank, N.A. (4th Cir. Md. Apr. 19, 2013)
Home Affordable Modification Program (“HAMP”). Passed as part of Congress’s response to the financial and housing crisis that started in fall of 2008.
Mortgagors brought breach of contract, negligence, and violation of Maryland Consumer Protection Act claims when Wells Fargo rejected their application for a mortgage modification under HAMP.
There is no privity of contract without a Trial Period Plan agreement.
No private right of action for alleged failure to follow HAMP guidelines.
Dismissal of all claims affirmed.
32
OTHER COURTS HOLD TRUE TO ESTABLISHED PRINCIPLES
ACA Fin. Guar. Corp. v. Goldman, Sachs & Co., (N.Y. App. Div., 1st Dep't May 14, 2013) Claims based on ABACUS CDOs were dismissed as plaintiffs were
found to be unable to plead justifiable reliance as it was “a highly sophisticated commercial entity” that could have verified the information it allegedly relied upon.
Wells Fargo Bank, NA v. Cherryland Mall L.P., 2013 Mich. App. LEXIS 651, 5, 2013 WL 1442053 (Mich. Ct. App. Apr. 9, 2013) Interesting case – involving a solvency covenant for a single purpose
entity. Paragraph 9 of the mortgage provides, in pertinent part: Single
Purpose Entity/Separateness. Mortgagor covenants and agrees as follows: (f) Mortgagor is and will remain solvent and Mortgagor will pay its debts and liabilities (including, as applicable, shared personnel and overhead expenses) from its assets as the same shall become due.
34
WHAT IS GOOD FAITH AND FAIR DEALING?
Can lenders rely on the terms of a loan agreement when calling loans or otherwise enforcing their rights.
How should concepts of good faith and fair dealing impact your lending decisions? How can borrowers use this to their advantage?
Given the current economic climate, borrowers are alleging breach of good faith and fair dealing by lenders.
35
GOOD FAITH QUIZ
Gilmore v Ute City Mortgage Co, 660 F Supp 437, 442 (D Colo 1986)
Finding that where lender rescinded commitment to lend and commitment was contingent upon lending committee approval, duty of good faith would not be met, and bank would have breached contract, if lender failed to submit commitment to lending committee.
KMC Co v Irving Trust Co, 757 F2d 752, 759-60 (6th Cir 1985)
Finding that even where literal terms of credit agreement allowed bank control over customer’s receivables and operating credit availability, duty of good faith required bank to provide notice and an opportunity to seek alternative financing before curtailing financing.
Continental Cas Co v Fifth/Third Bank, 418 F Supp 2d 964, 973 (ND Ohio 2006)
“’Mere failure to follow commercially reasonable banking procedures or to comply with its own policies’ does not per se equal bad faith” and concluding the bank had acted in good faith.
36
BE PREPARED FOR ANYING: SUING LENDERS FOR EMOTIONAL DISTRESS?
Claim allowed?
Lender’s alleged conduct of not providing borrowers with correct loan information, refusing to modify loan, losing papers and documents, and threatening foreclosure was “not so outrageous” as to support claim for intentional infliction of emotional distress.
Borrowers’ negligent infliction of emotional distress claim against lender failed where no physical impact alleged and no exceptions to impact rule applied.
Echeverria v. BAC Home Loans Servicing, LP, Case No. 6:10-cv-01933-JA-DAB (11th Cir. July 18, 2013)
(affirming dismissal of plaintiff’s claim)
37
ACTIONS UNDER THE LOAN AGREEMENTS
Will a strict enforcement of terms and conditions form the basis for a breach of the implied duty of good faith and fair dealing? Bank of America, N.A. v. Shelbourne Development Group, Inc., (N.D. Ill. Mar. 3, 2011) (“As the Seventh Circuit explains, Illinois law holds that parties to a contract are entitled to enforce the terms to the letter and an implied covenant of good faith cannot overrule or modify the express terms of a contract”).
Interpharm, Inc. v. Wells Fargo Bank, N.A. (S.D.N.Y. Mar. 31, 2010) (Lender liability claims dismissed to the extent that Wells Fargo had a right to threaten to do what it was legally entitled to do under the loan agreements).
Roswell Capital Partners LLC v. Alternative Constr. Tech., (S.D.N.Y. 2009) (Lender’s appointing two members to the Board of Directors, ownership of shares through the 2008 Funding were NOT an exercise of control, did not create a fiduciary duty, nor a breach of the duty of good faith and fair dealing as they were merely an exercise of plaintiff’s contractual rights).
Takeaway: Exercising contract rights to protect an investment should not be deemed bad faith.
38
LENDERS MUST BE MINDFUL OF THE DUTY OF GOOD FAITH AND FAIR DEALING WHEN INTERACTING WITH BORROWERS
A breach of this duty may be alleged as a defense or claim in a later litigation
Lenders should try to avoid:
Deviating from an established course of dealing with borrowers.
Acting precipitously and, without warning, exercising rights under loan documents or in accordance with depository set off language.
Exerting undue control over borrowers.
Demonstrating an unwillingness to negotiate or to engage in meaningful workout discussions with borrowers.
40
THE DANGER OF EXERCISING CONTROL
Do lenders expose themselves to liability to borrowers and potentially third parties if they exert undue control over borrowers?
OVER THE LINE? Can lenders require borrowers to obtain permission before making major changes in their business operations where such changes might affect the lenders’ security?
OVER THE LINE? Can lenders dictate changes in borrowers’ business plans, sales and credit policies, and daily business practices?
[A] lender may offer advice and use the leverage which its position gives it vis-a-vis the debtor, without being viewed as controlling the debtor, so long as the debtor continues to operate, and the management of the debtor continues to make its own business decisions.”
Lender Liability: Law, Practice and Prevention, § 5.7-8
41
DEFINING CONTROL
A determination of whether a lender has exerted undue control over a borrower typically is factual in nature, but a number of practices could raise red flags: Threatening the acceleration of a loan to influence borrowers’
decisions. Instituting mandatory financial plans on borrowers Deciding which of the borrowers’ creditors should be paid and in what
order. Making personnel decisions for borrowers. Advice relating to marketing, equipment purchasing, products,
location or expansion.
A bank’s right to receive regular financial reports and monitor [the debtor’s] performance, and even to limit salaries paid . . . , was not at all unusual in the context of a commercial loan and [did] not create a fiduciary relationship. Shawmut Bank, N.A. v. Wayman, 34 Mass. App. Ct. 20, 606 N.E.2d
925, 928 (Mass. App. Ct. 1993)
42
ENDING THE RELATIONSHIP WITHOUT CONTROLLING IT
FAMM Steel Inc. v. Sovereign Bank, 571 F.3d 93 (1st Cir. 2009)
Court dismissed the borrower’s claims that Sovereign had a fiduciary relationship with them since there was no evidence that despite Sovereign’s insistence that the consultants be hired, that they were acting under the bank’s direction.
The court noted that the lender’s actions took place while FAMM was in default, and that the majority of the allegations were based on the lender’s failure to take actions that were not required under the loan agreements
F.D.I.C. v. LeBlanc, 85 F.3d 815, 822 (1st Cir. 1996)
Under Massachusetts, law no breach of the implied covenant in a bank’s hard-nosed dealings with a borrower where it was undisputed that the bank did not take any of the adverse actions before the borrower defaulted.
Plaintiffs raised new arguments on appeal based on Illinois law, under which they asserted that the implied covenant requires a bank to exercise its discretion reasonably,
BA Mortgage & Int’l Realty Corp. v. Am. Nat’l Bank & Trust Co. of Chi., 706 F. Supp. 1364, 1373 (N.D. Ill. 1989)
43
DEFAULTS, WAIVERS, & AMENDMENTS
Identify all defaults you discover, know and/or suspect
Clearly indicate which defaults are being waived by section
and title
Communicate with in-house counsel and do not spare the
details
Waiver of defaults
Make sure all amendments are defined and agreed to in
writing
44
SO, BEFORE JUMPING INTO THE DEEP END … Conduct proper due diligence.
Know your warranties, representations, and covenants.
Check the release language. Are there intercreditor agreements and, if
not, should there have been? Assignment documentation. Collateral viability and exit strategy. Boot collateral. Guaranties and other avenues of recourse.
45
CONTROL AS “UNCLEAN HANDS”?
Domus, Inc. v. Davis-Giovinazzo Constr. Co., (E.D. Pa. Aug. 22, 2011) Creditors claiming priority to certain account receivables obtained
in an arbitration action alleged that the secured creditor, Susquehanna had overstepped its authority by filing AAA Arbitration proceedings on behalf of the borrower.
However, the Security Agreement explicitly allowed the bank to step into the borrower’s shoes and collect amounts due to the borrower.
Other creditors argued that Susquehanna had unclean hands due to its failure to comply with the minority business enterprise certification requirements.
The court however, rejected the argument as it found the bank neither knowingly or intentionally failed to comply, and regardless, there was no evidence that it thus harmed the other creditors.
46
TOO MUCH MEDDLING OR GOOD BUSINESS SENSE?
In the days prior to the closing of the June Loan, Key attempted to make three changes to Velocity’s contract with Sanden without Velocity’s knowledge.
First, Key proposed and Sanden agreed that the third progress payment would be paid when the press was delivered to Velocity, rather than the date it was operating on Sanden’s floor as provided in the Velocity-Sanden contract.
Second, Key obtained a first position security interest in the initial $250,000 of parts and materials purchased to construct Velocity’s press, even though Velocity’s contract with Sanden gave Sanden the first position security interest in that material.
Third, Key informed Sanden that it would have to obtain a letter of credit to secure the second progress payment before that payment would be advanced. Elkins testified that he would not have signed the June Loan documents had he been aware of these changes.
At trial, the U.S. District Court for the District of Utah found Key liable on fraudulent inducement, violation of the implied covenant of good faith and breach of fiduciary duty theories.
The 10th Circuit rejected the breach of fiduciary duty theory but affirmed on fraudulent inducement and breach of the covenant of good faith grounds, citing Key’s communications with Sanden without Velocity’s knowledge and the fact that the changes Key negotiated were inconsistent with the original purpose of the loan agreement.
Velocity Press v. Key Bank, N.A., (10th Cir. 2014)
48
COLLATERAL BASICS: PERFECTION: RECORD, MONITOR, &
AUDIT YOUR SECURITY INTEREST, LIEN & COLLATERAL
You cannot over-perfect
File financing statements in each jurisdiction
where an issue of filing may arise
Conduct reviews of UCC filing statements
concerning your debtor
Inspect your collateral, and be vigilant about
missing items
Knowledge of missing items + inaction ?=?
waiver
49
IS POSSESSION REALLY 9/10’S OF THE LAW?
• Get physical.
• Beware of unique collateral classes.
• If you can physically move the collateral, others can
too.
• In certain foreign jurisdictions, the first creditor to
take possession of collateral has priority rights to
that collateral.
• Consider bailees and bailors.
• Keep it in the United States if possible.
50
LIABILITIES IN DEALING WITH COLLATERAL
Environmental Example Ultimate Industries Site - October 2012 – Agreement by the lender to pay for 10% of the costs incurred by the EPA in removing hazardous waste drums at a facility that had been owned by the defunct borrower.
State of Ohio v. Estate of Roberts (Ohio 2010) – Court of Appeals found that there were issues of fact as to whether the bank failed to properly dispose of the drums and allowed useful assets to deteriorate into hazardous waste
After the bank had taken possession of the property, it in fall of 2004, the bank
sold some of the equipment, and 2 of the 35 drums with usable chemicals, paint, and stain.
Bank bought the property at the foreclosure sale but moved to vacate the sale due to “newly discovered evidence.”
The hole left by the sale of one piece of equipment led to a defect and subsequent leak, resulting in black mold.
51
INDIRECT LIABILITY Consumer Financial Protection Bureau Bulletin 2013-02, dated March 21,
2013 In auto financing, auto dealers often facilitate indirect financing by a third party
(who does not actually meet the consumer) by providing basic information regarding the applicant and in turn receiving offers to provide financing at a certain rate.
Some indirect auto lenders allow dealers to mark up the interest rate above the indirect auto lender’s rate and the difference is typically called the “reserve,” which becomes one way the auto dealer is compensated.
The Bulletin warns that an indirect auto lender is a “creditor” under the Equal Credit Opportunity Act, which prohibits discrimination based on race, national origin, and other prohibited bases, and thus could be liable under the Act. Creditor includes “any assignee of an original creditor who participates in the
decision to extend, renew, or continue credit.”
Specifically, the Bulletin noted that the policy to allow auto dealer to mark up lender-established rate and compensate dealers from the markups created incentives, which, coupled with the discretion permitted, that posed a significant risk of resulting disparities in the pricing of auto loans.
52
INDIRECT LIABILITY - SUCCESSORS
Drakopoulos v. U.S. Bank National Association (SJC Mass. July 12, 2013)
Found that a bank, not the original lender but holder of a residential mortgage through assignment and its servicer, was subject to claims seeking damages and rescission for violations of the Predatory Home Loan Practices Act, the Massachusetts Consumer Protection Act, and the Borrower’s Interest Act.
Court determined that the fact that the bank was the assignee and not the original lender did not shield the bank from liability.
The court absolved the servicer for claims arising from the actions of the original lender, as it was not an assignee
53
OVERREACHING OR JUST BUSINESS?
Credit Suisse v. Official Committee of Unsecured Creditors (In re Yellowstone Mountain Club), Case No. 08-61570-11, Adv. No. 09-00014, 2009 Bankr. LEXIS 2047 (D. Mo. May 13, 2009) Facts:
CS creates loan for property developers that allows them to take most of the money in the form of a dividend. CS then sells off most of the loan to participants, externalizing all of the risk while keeping origination fees for itself.
CS markets loan to Yellowstone, a high end property development with cash flow problems, and after aggressive pursuit, an agreement is reached to loan $375M secured by the property.
Problem: Initial valuation of the property at “market value” was $420M, making loan-to-value ratio too high for CS.
Solution: CS invents the “Total Net Value” valuation method, applies a discount rate of zero to Yellowstone’s cash-flows, and originates loan through an offshore subsidiary to avoid compliance with Financial Institutions Reform Act of 1989 methodology.
CS collects $7.5M in fees and sells off all of the loan to third party investors
54
WHAT ELSE ARE THOSE COUNTERPARTIES UP TO?
Attack on jury waivers
Reliance on state court claims to avoid the bounds of the credit agreement (interference with business relations; fraudulent inducement; duress; forum shopping; deceptive business practices; frustration of performance; etc.)
Impairing collateral
Resorting to bankruptcy filings
Multiple changes in counsel
Rushing to the courthouse to file first
Attacking legal fees incurred by the lender and other loan administration expenses
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SOMETHING WE KNOW BUT DON’T TALK ABOUT IN PUBLIC
E-mails are forever and are discoverable.
E-mails are evidence.
Be aware of course of conduct arguments.
Often, e-mails are the best/worst evidence.
E-mails never tell the full story, leaving much room for interpretation.
E-mails should only be used to confirm oral statements from borrowers.
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SIDEBAR: CAN E-MAILS MODIFY CONTRACTS?
Stevens v. Publicis, S.A., 2008 NY Slip Op 2880, 3, 50 A.D.3d 253, 255-56, 854 N.Y.S.2d 690 (1st Dep't 2008)
Found that e-mails from plaintiff to defendant agreeing to modification of the contract were found to “constitute ‘signed writings’ within the meaning of the statute of frauds” and thus the contract, as modified was enforceable
Tomer v. Hollister Assocs., Massachusetts 2006
Contract altered despite existence of a no-oral-modification clause because the “Court considers e-mail communications, in which the sender and recipient are clearly identified, to constitute writings.”
Lesson Learned: If you wouldn’t send it to your counterparty in hard-copy form, don’t send it by e-mail.
Treat e-mail and hard paper as the same thing.
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FORBEARANCE AGREEMENTS
• Be careful not to create enforceable obligations to extend credit or
renew the loan. Do not make promises inconsistent with the terms of
the agreement, or statements that may be construed as such.
• Acknowledgements concerning defaults and the amount of debt.
• Lock down the borrower. Use specific integration clause stating that
borrower has not relied on any promises outside of agreement. If orally
negotiating, never agree to anything and state that internal approval is
still required.
• Releases. Have borrower sign a broad release that specifically
precludes promissory fraud, misrepresentation, and language that could
be construed as a covenant not to sue.
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•Forbearance Period – stops the legal fees, the disputes, and cools tempers
•Send follow-up emails after conversations stating that nothing is agreed to
without internal approval.
•Give all agreements to borrower in advance of closing to ensure time for
review. Have borrower sign specifying that it has:
• Read and understands agreement,
• Consulted with counsel,
• Not relied on any promises other than in the agreement, and
• Has made their own investigations and that the failure to do so is no
defense to enforcement of agreement.
FORBEARANCE CONTINUED
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This presentation is not intended to provide, and should not be construed as providing, legal advice. This presentation may not reflect current legal developments, or laws or rules that may apply in particular jurisdictions. You should not act or refrain from acting based upon your use of this presentation, without first consulting with and engaging a competent, qualified, and licensed attorney who is authorized to practice law in the jurisdiction or jurisdictions of relevance to you. Hahn & Hessen, the Rose Law Firm, their lawyers, and Messrs. Newman and Donovan expressly
disclaim all liability in connection with actions taken or not taken based on any or all of the content or information contained herein.
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