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Good Times for Lenders

The Annual Cocktail Party Talking Points

Posted in Articles, Good Times for Lenders

If you are anything like me, you enjoy discussing bankruptcy and litigation issues at social gatherings.  It’s basically like being the Most Interesting Man in the World , except the opposite of that.  Or, at the very least it will end a conversation with someone you didn’t want to speak with. With that in mind, below I have compiled the first annual Cocktail Party Talking Points.  Please use them as you see fit.

RetroCocktailParty

The Energy Bubble.  With the Saudis keeping the pedal to the metal on production while the US is in the midst of an energy boom, the cost of oil and gas has tanked.  With margins burning off, the E&P firms who had been surviving of cheap liquidity may be in for a correction.  Read about it on Bloomberg.

Radio Shack is still Kicking Along.  The beleaguered tech retailer Radio Shack continues its attempt to not default on its various lines of credit and stave off bankruptcy.  As it attempts to cut $400MM annually from the budget, the retailer must obtain lender consent to close stores.  Meanwhile, the company’s credit default swap spread is at 144%.  Read about it on CNBC.

East Cleveland Considers Bankruptcy.  The city of East Cleveland, which is a suburb of Cleveland, is “on the verge of collapse” according to the Ohio state auditor.  While the city is relatively small, the emergence of another municipality on the brink of bankruptcy is a reminder that municipalities are still in trouble and the economy has been slow to work through their financial issues.  The city will decide whether to file bankruptcy in Q1 2015.  Read more about it on Reuters.

The Fed Ups the Capital Requirement for 8 Largest Banks.  Under the new Fed guidelines, “the eight largest U.S. banks would need to have an additional capital buffer of between 1% and 4.5% of their risk-weighted assets, based on the relative threat a bank poses to the financial system as calculated by the Fed.”  According to Janet Yellen, this rule “would encourage such firms to reduce their systemic footprint and lessen the treat that their failure could pose to overall financial stability.”  The biggest impact is expected to be on JP Morgan which faces an apparent shortfall of $21B.  Read more about it on the Wall Street Journal.

That Argentina thing is Still Going on.  Earlier this year, Argentine defaulted on bonds governed under US law and has been embroiled in lawsuits both before and after.  It’s still going on.  To further its troubles, Argentina made a bond offering under is local laws and raised about 10% of the $3B being offered.  Notwithstanding, the Argentina Economy Minister presented the participation as evidence of investors’ confidence in Argentina.  Read more about it on Bloomberg.

And finally, a palette cleanser…

California Family Judge gets mean.  In California, ex-state family law judge Healy was admonished (which is a sever finger-wagging at in legal speak) for telling a mother accused of drunk driving that she didn’t “understand the beatdown that was coming…”.  After discussing the drug and alcohol use by the husband and wife, the Judge wondered aloud if “they’re trying out for Jersey Shore.”  The Judge summed up the wife as a “total human disaster”.  Finally, in another hearing, the Judge informed the mother that her daughter would no doubt end up as a “hooker” based on the mother’s attitude.  Formal document is here.

Have a happy and safe holiday.  Look for my next post in January 2015.

Technology Notes

Bankrupt Bitcoin Exchange Mt. Gox begins to Pay Back Account Holders in Bitcoin

Posted in Technology Notes, Workout Issues

Bitcoin is one of several crypto-currencies which are exchanged generally outside of sovereign control and all electronically.  In early 2014, a Bitcoin exchange named Mt. Gox filed bankruptcy in Tokyo and subsequently sought additional protection in the US by filing a chapter 15 bankruptcy petition.  Just recently, the bankruptcy trustee in Tokyo has announced he will begin to pay back account holders in Bitcoin using a US based bitcoin exchange.

Dogecoin is another crypto-currency and is my personal favorite because of the mascot.

Dogecoin is another crypto-currency and is my personal favorite because of the mascot.

First, some background.  Skip this is you are familiar with Bitcoin

Bitcoin is not a “coin” at all in the traditional sense.  Rather, one bitcoin is essentially a complex mathematical code which is recorded on a public ledger as one bitcoin.  That bitcoin has a two security keys which permit the bitcoin to be owned by (and transferred) by a person.

  1. The public key allows the bitcoin to be utilized by the bitcoin exchanges.
  2. The private key is what is used by the bitcoin holder to transfer the bitcoin value to the recipient.

So, in a sense, your bitcoin “wallet” will not hold any coins (or currency), but rather your bitcoin private keys.  When you spend bitcoins from your wallet, you are using your private key to tell the online public ledger to reflect a transfer of bitcoin to a new owner.  That new owner gets a new private key and the bitcoin transaction is complete.

The mathematics and cryptography are significantly more complicated than that.  But, from a consumer standpoint, this is essentially what the transaction looks like.

Unlike sovereign issued (and backed) currency, Bitcoin has no government backing and very little government regulation.

  • There is no Federal Reserve or similar body for bitcoin.
  • There is no government producing bitcoin.
  • Regulations (or lack of regulation) vary significantly globally.
  • All bitcoins are produced by “mining” which is basically utilizing a very complex mathematical proof to create a one-of-a-kind number, which is the bitcoin.

The amount of computing power to mine bitcoins is not insignificant because of the complexity.  Thus, Bitcoin exchanges, such as Mt. Gox will commit resources to do so and will offer exchange services, payment services, wallets and other ancillary quasi-banking services to consumer account holders.

Second, what is going on in the Mt. Gox Case.

When Mt. Gox filed bankruptcy, one of the stated reasons for the bankruptcy was that it had lost 850,000 bitcoins.  At the time, the value of these was about $500,000.00 (USD).

After the bankruptcy was filed, the bankruptcy trustee found about 200,000 of the lost bitcoins.  However, much of the remaining unaccounted bitcoins belonged to account holders at Mt. Gox.  Although, Mt. Gox did hold bitcoin on its own account.  The loss was attributed to hackers and technical issues with the exchange site itself.

After proceeding with the bankruptcy case, the bankruptcy trustee had suggested that the Mr. Gox bitcoins be converted to USD and then used to repay the account holders at Mt. Gox who had lost their bitcoins.  In an interesting turn of events, the creditors demanded to be repaid in bitcoin.  The reasons probably vary, but it is likely the creditors did not want the already volatile bitcoin market to tank when the bitcoins were exchanged for cash.

In order to go about that, the bankruptcy trustee has enlisted the help of another bitcoin exchange named Kraken, which is based in the US.

Finally, things to consider

From an overview perspective; the first thing to consider is that Bitcoin specifically, and perhaps the other crypto-currencies, are not going away despite high profile failures such as Mt. Gox.  Some domestic retailers are now accepting Bitcoin for day-to-day exchanges as they would cash.  Notwithstanding, the market remains very volatile.

At a more narrow level, a bankruptcy court (even in Japan) that pays the creditors in non-sovereign backed crypto-currency should raise a few eyebrows. In this case, it appears that the payment in bitcoin was at the request of the creditors.  However, it is not clear what would happen if account holders had demanded USD (or yen), but received bitcoin while non-account holder creditors were paid from liquidating traditional hard assets in cash.

Obviously there are significant other issues to consider which are not covered in this humble blog post.  Regardless, these issues and others are on the horizon.

Tough Times for Lenders

Bankrupt Individuals Can’t Strip Down Senior Lenders in Ch. 7, but the SCOTUS will decide if they Can Strip Off – Leaving Junior Mortgage Lenders Unsecured

Posted in Tough Times for Lenders, Uncategorized, Workout Issues

The SCOTUS has recently decided to hear an appeal to consider whether junior mortgage liens, which are out of the money, on chapter 7 debtor’s homes may be voided simply because there is no equity in the home to attach to the junior lien at the time of the bankruptcy filing.  The effect of a win by the debtor would be to permit bankrupt individuals to wipe out junior mortgages in chapter 7 when the senior lender’s lien debt is greater than the value of the home.

home underwater

In bankruptcy, a secured creditor’s claim is considered to be bifurcated for the purposes treatment under a plan (see chapter 11 or 13 usually).  More simply, when the secured claim exceeds the value of the collateral, the secured claim equals the collateral value and the portion of the debt above the collateral value is considered to be unsecured.

In a chapter 13 bankruptcy case (an individual’s version of chapter 11), some secured claims may be stripped downie, the secured portion is reduced to the collateral value.  Similarly, in chapter 13, junior lien holders who’s debt is behind a senior lien debt which is greater than the collateral value may be stripped off (rendered unsecured entirely).

In chapter 7, there is no plan treatment, and thus the distinction between debt is trumped by the general rule that a lien rides through bankruptcy, and thus – regardless of the valuation of the collateral – the secured lender is entitled to its entire secured claim against the property.  The debt is generally not enforceable against the individual, through, after discharge.  The SCOTUS has ruled in the past that a chapter 7 debtor may not strip down a lien.

However – the code section that provides for the distinction between the secured vs. unsecured portion of the debt also states that the lien of a purported secured creditor is “void” if the underlying claim is not an allowed secured claim.

Here is the issue:

  • A couple of chapter 7 bankrupt debtors in Florida have claimed that a junior lien which is junior to an already underwater senior lien is not a “secured creditor” and thus has no allowed secured claim (ie, there is no secured portion of the claim).
  • Thus – they argue – the second lien on their residential mortgage is void under the law because it is not a secured claim.

The Bankruptcy Court agreed with this argument over the objection of Bank of America, who is the junior lien servicer/holder.

BofA, seeing that this might be a little bit of a nationwide issue, promptly appealed two of the rulings to the SCOTUS, which has not yet heard the appeals.

The effect on residential lenders will be a little different depending on their respective position in the lien stack:

  1. The issue to be determined is of some consequence to senior lien holders because, if the junior lien is voided in a chapter 7 on undersecured collateral, the senior lien holder may have a little more flexibility in deciding whether to negotiate or take back the home.
  2. For junior mortgage holders, the issue is of greater consequence.  While the junior lien may have been out of the money at the time the bankruptcy was filed, the house may appreciate in value before the senior lender forecloses or the borrower sells.

Once the SCOTUS rules on the pending appeals, the ruling will affect the treatment of junior chapter 7 mortgage holders nationwide.

(As a side note, I missed last week’s post because I was in trial.  I would also like to thank the folks at Apple, Inc. for the traffic viewing the last post.  Swing by anytime.)

Tough Times for Lenders

Confidential Information May Not be so Confidential in Bankruptcy. Just Ask Apple.

Posted in Tough Times for Lenders, Trade Secrets, Workout Issues

It is said that when the debtor files bankruptcy the debtor is in a fish bowl.  The reason is simple:  the debtor in bankruptcy is required to make honest and sworn disclosure of all manner of financial and operational information on request and at regular intervals per the bankruptcy code.  Often, new and exciting liabilities and obligations are discovered by the lenders when their borrower files bankruptcy.  The policy behind this is obvious.  Moreover, rarely does a debtor find itself in bankruptcy because it was too honest.  However, sometimes this statutory preference for sharing collides with the real need to keep trade secrets, secret.

Apple Fish Bowl

Many of you probably heard of the Apple, Inc. vendor who filed bankruptcy.  The vendor, who is GT Advanced Technologies, Inc. and affiliates, made the screens for Apple phones.  The bankruptcy filing made the news because of the stunning possibility that anything related to Apple could be in financial peril.

The screens are technically difficult to make, but Apple sold over 10 million IPhone 6 phones in the first week.  Compare that to reports of Amazon Fire Phone sales of 34 thousand after two weeks.

As it turned out, the sheer scale of endeavor was too much for GT.  Also, it turned out that Apple requires, what some may call, significantly one sided contract provisions.

Two of the many things the contracts between Apple and GT required were:

i.            Attempt to make a bankruptcy remote entity, and

ii.            Keep Apple’s secrets, secret.

As it turns out, it only kind of worked.

For confidentiality, Apple’s terms provided that GT would be liable for $50 million in liquidated damages for each occurrence of disclosure by GT of protected information.  The information protected from disclosure was extremely broad and included disclosing “the nature of their business relationship” and the terms of the contract itself.

For the bankruptcy remote entity, it filed bankruptcy also.  It was faced with the specter of the enormous burden of the liquidated damages, among other things.

In a typical bankruptcy, GT would be required by law to disclose many parts of the business relationship with Apple on a regular basis, typically monthly as well as the terms of the agreements.  The potential for liquidated is therefore large.

However, the wayward debtor is not without salvation.  The bankruptcy code also allows the Court to “protect an entity with respect to a trade secret or confidential research, development, or commercial information;…” upon request.

Piece of cake, right?

Nope. The Bankruptcy Judge in GT didn’t feel that the information provided to him under seal was worthy of protection – notwithstanding the $50MM liquidated damages – and ordered the majority of it to be made public.  So – the information that was provided to the Court to justify the secrecy was in turn simply filed on the docket for all to see after the Judge made the ruling.

If you were interested in the business relationship between Apple and GT and their sapphire screens, unprecedented attempt to meet demand and ultimate downfall – it’s on the docket.  I should note, though, when I checked there was nothing of a purely technical nature.  Thus, the ruling is more a bench mark for expectation of what may actually be confidential in bankruptcy.

For borrowers, this is clearly a difficult path to thread.  For investors, this is a cautionary tale of how to protect your value.  For lenders, this provides some backstop to the idea that all trade secrets will be secret in bankruptcy.  Of course, if the borrower’s income exists because of a trade secret and it becomes public, you might not be getting paid back.

In re GT Advanced Technologies, Inc., et al., case no. 14-11916, pending in the United States Bankruptcy Court for the District of Delaware

Money for Nothing and Overdraft Fees

Posted in Uncategorized

Between 2005 and 2007, Wells Fargo made a paltry $1.4 billion in overdraft fees.  However, a California Federal Court found that those fees were a result of misleading practices and ordered Wells Fargo pay $203 million in restitution.  The award was recently affirmed by the Federal Appeals Court in the Ninth Circuit.  Gutierrez v. Wells Fargo, 2014 WL 5462407.

Overdraft fees put clients in dire straights

Overdraft fees put clients in dire straights

At the heart of the issue in the Gutierrez case was Wells Fargo’s practice of posting debits at the end of the day “high-to-low”; meaning, the largest debit was posted first and sequentially less debits were posted after in order of decreasing amount.  The alternative methods identified by the Court would have been “low-to-high” and “chronological”.

  • In high-to-low posting, the funds in the account are depleted more quickly, the result being that the remaining smaller debits create a larger number of overdrafts.  Thus, the overdraft fees are “maximized”.
  • On the other hand, the low-to-high posting allows the smaller debits to be satisfied first, leaving a lower number of overdrafts and thus lower overdraft fees.

The plaintiffs sued Wells Fargo under California law for unfair, unlawful, or fraudulent business practices.  Wells Fargo countered claiming that Federal Law, namely, the National Bank Act preempted (trumped) the state law, and therefore Wells Fargo was free to post the debits however they wanted.

The trial court found that:

  1. The “decision to post debit-card transactions in high-to-low order was made for the sole purpose of maximizing the number of overdrafts assessed on its customers”,
  2. Wells Fargo hid and misrepresented the way debit transactions were posted in their disclosures,
  3. Federal Law did not preempt the state law and Wells Fargo was liable for being both unfair and fraudulent in its posting high-to-low, and
  4. The plaintiffs (as a class) were entitled to $203 million in restitution, among other things.

Wells Fargo appealed.  In the first appellate opinion in this case (entered in 2012), the Ninth Circuit held that Federal Law permitted the high-to-low posting of debit transactions, and preempted the state law claim that the high-to-low posting was unfair.

but

The Ninth Circuit held that Wells Fargo was liable under the fraudulent prong of the state Unfair Competition Law.   Specifically, the Ninth Circuit affirmed the trial court’s holding that Wells Fargo’s failure to disclose the effect of the high-to-low posting combined with Wells Fargo’s “misleading statements” combined to make Wells Fargo liable under a fraud theory as a misleading statement. Further – this type of state law violation “is not preempted by the National Bank Act”.

Litigation continued until October 29, 2014, when the Ninth Circuit affirmed (in an unpublished opinion) the trial court’s award of $203 million in restitution and related injunction against Wells Fargo for violation of California’s Unfair Competition Law which prohibits misleading statements.

Normally, I would wrap up with how this would affect lenders, but I think it’s self-evident.  However, it is worth summing up a couple of things to consider:

First, lenders might want to take a look at their motivations and disclosures regarding overdraft fees.

 Second, lenders should be aware that their activities may be perfectly legal under Federal Law, but nevertheless may subject to them to liability under state law.

At the moment, the ruling considers only California Law, but it’s a safe bet that bank clients around the country who are being charged fees for having no money will be looking at those overdraft fees.

Tough Times for Lenders

How to Delete Your Way Into Liability

Posted in Lender Liability, Remedies, Tough Times for Lenders

I always assume that people who like NASCAR are really watching for the wrecks.  The cars loop around the track for hours, but only the wrecks make the highlight reels.  In a recent Texas Supreme Court case, the high court considered whether a supermarket was liable for destruction of evidence when it retained only the video recorded around the time of a slip and fall after its looped camera system deleted the rest.

shake and bake

The case is Brookshire Brothers Ltd. v. Aldridge at the Texas Supreme Court (for those of you outside of Texas, Brookshire Brothers is a supermarket).

In the Brookshire case, a slip and fall claim made it to the SCOTX because Brookshire had allowed a security camera (on a loop) to record over all but a few minutes before and after of the actual fall.  At the heart of Brookshire’s reasoning for recording over the video was the risk manager’s mistaken belief that the time prior to the fall was “not relevant”.

Even folks not familiar with the law have a general concept that destroying evidence is a bad thing.  The question in practical terms in a real lawsuit is – what is “evidence”.  At the heart of that question is relevance to the dispute.  That concept fills volumes of scholarly papers.  I won’t go into it here.

It is enough to know in the Brookshire case that the deleted portion of the looped tape was relevant, destroyed and the subject of the appeal. The Brookshire opinion is helpful for a few reasons, but primarily because it attempts to give a bright line to follow for dealing with a potential spoliation issue (which is the fancy name for “destroying evidence”).

For the lawyers reading, the SCOTX sets forth the test to determine after the fact whether evidence has been spoiled.

  • The trial judge gets to decide whether spoliation has occurred.
  • If so, did the party have a duty to reasonably preserve the evidence and did the party negligent breach that duty by failing to do so.

If the Judge determines that evidence has been destroyed, then the Judge gets to decide the remedy (which might include a spoliation instruction to the jury).

Important for the lenders on the front end – According to the SCOTX:

  • The duty to preserve arises when a party reasonably knows there is a substantial chance that a claim will be filed, and
  • That evidence in its possession or control will be material and relevant to the case.
  • Substantial chance of litigation means: when litigation is more than an abstract possibility or fear.

For the lenders, the take home rule is that if you spoil evidence either intentionally or negligently, after being aware of the claim you might be liable.

(A side concern is when does the duty actually arise?  In a future post I may go over litigation hold letters if anyone is interested)

Once you have spoiled evidence, the remedies are wide-ranging and unpleasant.  In Texas, if the spoliation was intentional then the jury may be instructed that all the spoiled evidence will reflect negatively on the spoiler.  Meaning, even if the destroyed evidence actually showed you doing the right thing, the court may instruct the jury that you were doing the wrong thing.

The Brookshire’s case is more than important to lenders.  Forget for a moment that this is a slip and fall grocery store case.  Rather, assume this is a lender liability suit and consider the volume of data that is aggregated and deleted daily in your databases.  For lenders, that alleged bad act rarely occurs in the branch office, but rather in the broader lending relationship.  The email statements, verbal statements, internal memos, meeting notes, calendar entries, etc. may be evidence at the next lender liability lawsuit.  At what rate are those being deleted and by whom?  Importantly, what does your retention policy look like?

Some clients have systems that automatically delete data as the data stream goes forward.  (Not to say that a doc retention policy can’t do that, but when a duty to preserve arises it generally will trump the retention policy.)  The lesson here is that regardless of whether your data is being deleted on a loop or not, you still want to be able to preserve all the information about the crash and not just the crash itself.

Technology Notes

Regulatory Cost Collaboration By ALL! (Even the Lawyers)

Posted in Compliance, Technology Innovation, Technology Notes

In meetings with senior executives and their in-house counsel, I hear this consistent cry: due to ever-increasing regulations, costs associated with compliance are soaring at commercial banks and at financial institutions that own banks (such as life insurance companies).  As a result, “regulatory cost collaboration” is becoming a key strategy for financial institutions with their key vendors.  It is a strategy that overlooks a very familiar and expense vendor: lawyers.

 

Puzzle missing legal

This omission will not last for long.

The impact of compliance costs is well documented (look at this report by Thomson Reuters; and this survey of small banks by Hester Peirce, Ian Robinson and Thomas Stratmann at the Mercatus Center [George Mason University]).

It is a story that I hear 100% of the time from senior executives.  Here are two examples:

  • Regional Bank (top 70 in asset size): it spent over $35million last year in regulatory compliance costs, such as rent, new employees, software and hardware
  • National Bank  (top 20 in asset size): the compliance group has grown from 100 employees to over 700 employees in the last several years

In response to the growth in regulations, financial institutions are striving to streamline processes, both internally and with their vendors.

In the context of third-party vendors, I call this “regulatory cost collaboration.”

Financial institutions with innovative leadership use “regulatory cost collaboration” like this:

  • the financial institution associates specific information, furnished by a specific vendor, with information needed under (or impacted by) regulations or compliance rules; and then
  • the scope of work for the vendor expressly requires performance of the vendor’s service or product in a form or format that minimizes the associated regulatory costs to be incurred by the financial institution

Vendors who implement this approach (or better yet, for a vendor who independently identifies a way to do this) are recognized as a “value-add vender” by the financial institution.

Of course, regulatory cost collaboration does not include the lawyers.

No one is surprised.

Collaboration from Lawyers: The Elephant in the Room

Collaboration from Lawyers:
The Elephant in the Room

 

Lawyers are one of the few “industries” where little has changed since I started in 1981.  “What” lawyers do and the “product” that lawyers deliver remains astonishingly unchanged since 1981.  Sure, today we have computers (and no secretaries), email (and no life) and instant access to everything (the internet is magical); and instead of paper closing binders, we e-mail the closing documents in a PDF format.

None of these changes meets my definition of the phrase “regulatory cost collaboration.”   Indeed, the changes remain lawyer-centric – even the PDF.

Unless the financial institution has specific rules governing the use of PDFs, the use of PDFs actually might be “anti-collaborative” in that it creates MORE work for the financial institution -

  • the PDF still must be “searched” in order to locate specific terms and provisions (since lawyers will “drop” a key provision in any location and in any document);
  • the PDF might not be in a searchable format;
  • even if searchable, the provision might be difficult to locate because the reader may fail to use the “correct” search term or phrases;
  • the identifier or name of the PDF itself might be unrecognizable (since it was generated by the law firm document management system); thus forcing the recipient to “open” it and then rename it

Of course, Richard Susskind and others continue to predict some sort of disruptive change, where the legal industry will deliver the product (be it paper or expensive advice) in a manner that assists Companies in conducting business.  There were numerous conferences and meetings on the topic in the past year (Harvard Law; Suffolk University Law [Kennedy-Mighell podcast summary]); and various legal tech thought-leaders closely monitor the topic (the ABA Law Practice Magazine, July/August 2014 issue is wonderful; and the ABA Legal Rebels is interesting).

Of course, nothing addresses the practical, real time (right now) need for regulatory cost collaboration by lawyers.

Yet.  Stay tuned.

If you see this differently or have something to add, please comment below.

Tough Times for Lenders

No Good Deed Goes Unpunished When Accepting Payment from a Non-Borrower on Behalf of a Borrower

Posted in Guaranty Issues, Lender Liability, Tough Times for Lenders

I have found this to be true over and over again.  Maybe it’s just my line of work.

Grump Cat

Part of my regular practice is being called in by the transactional lawyers (paper pushers) as they paper up a new loan or re-fi.  My job in those situations is to give my thoughts on what will happen should the worst occur (eg, default, receivership, bankruptcy, lawsuit, etc.) and how to minimize the risks to the lender.

Often times, identifying potential fraudulent transfer exposure on the front end is of concern when the lender creates some type of relationship with a non-borrower affiliate or insider of the borrower. The usual situation is a guarantor, but other situations exist such as payment from a non-borrower affiliate.  A recent 5th Circuit case discusses such a situation.

The BackgroundSkip this if you are Familiar with Fraudulent Transfers

There are a few types of “fraudulent transfers” under both federal and state law.  Generally speaking, however, a fraudulent transfer occurs in two ways:

  1. When bad guy transfers something of value to the other guy in exchange for something that is less than reasonably equivalent value.  Think, cow for the beans. Or,
  2. When the bad guy transfers something to 2nd bad guy in an out-and-out fraudulent scheme.

I have oversimplified it to fit into a minimal of bullet points.  The gist is to recover value when the transferor (sender) transfers value to another party when the transfer would reduce the overall value of the transferor.  The underlying idea being that other creditors need protection from a transferor sending all its assets to his buddy in exchange for minimal or no value in order to defeat collection by other creditors.

Many of you have already had to deal with this issue in lending.  For the un-litigated, this arises for lenders in situations where the bank is receiving payments from a non-borrower on account of an existing loan.  In that situation, the bank may be receiving money (the value) but not giving anything back to the non-borrower in exchange.  (In a normal repayment, the funds paid by a borrower credit the debt, thus equivalent value exchange).

The Recent RulingThe Netting Effect

 In the case of a lender who is taking funds from a non-borrower in good faith, there is some protection when sued for fraudulent transfer under the bankruptcy code.  This was the issue recently discussed in Williams v. FDIC in the Fifth Circuit.

At issue was what happens when a unknowing lender has received a fraudulent transfer from a non-borrower because of actual fraud, but the non-borrower transferor actually received some (but not full) indirect benefit.  Specifically, the non-borrower affiliate company directly paid the mortgage payment to the lender on commercial property as “rent” thereby staving off foreclosure on behalf of the building owner (who was the borrower).

In this case, the Fifth Circuit said that the good faith lender is liable for fraudulent transfer, but the lender was only liable for the net amount received greater than the benefit obtained by the transferor.

  •  Ex:  Lender was paid $100.  Non-Borrower transferor obtained $70 in value.  Bank is liable for $30.

Why is this important?  The lender need not be a party to a fraudulent scheme to get tagged with a fraudulent transfer lawsuit.  In that situation, even if the lender can show that it exchanged reasonably equivalent value (the normal bank defense), if the payment was part of an actual fraudulent scheme the bank had no idea existed – the bank will still be liable for the “net” positive it received over the transferor’s “net” negative.

This type of risk is, of course, inherently difficult to quantify.  A valuation of the unknown benefit is obviously a difficult proposition on the front end.  This remains true at the time the lender determines to accept payment from the non-borrower.  Additionally, the retrospective value determined may not always be the prospective value anticipated.

Just something to think about when you are assessing the risk of accepting funds from non-borrowers and looping in insiders and affiliates to the obligation stack.

Technology Notes

Back to Blogging (Better Blogging – Tips & Testimonial)

Posted in Technology Notes

I’m back. Back to blogging. Home here at L360.

The Return of the Prodigal Son Painting by Bartholome Esteban Murillo National Gallery of Art (Washington, D.C.)

The Return of the Prodigal Son
Painting by Bartholome Esteban Murillo
National Gallery of Art (Washington, D.C.)

Several years ago, Kevin O’Keefe or Tom Mighell (one of them) commented that the majority of legal blogs last less than a year. Clearly, I’m one of them on quiting. It just took me longer to quit.

I stopped regularly blogging after 4 years (from September, 2008 until October 2012), and after over 420 blog entries. Always focusing on commercial finance, I started blogging on distressed debt topics (under the “ToughTimesForLenders” blog name).  As the economy (kind of) recovered, the blog became “Lenders360blog” in order to cover “positive” finance topics. Finally, technology was added since it is an operational pillar for all commercial lenders.

This threefold transformation reflected my personal journey. After all, blogging is personal. (Blogging tip #1: make your blog personal. Ditch the academic mumbo-dumbo. Mix meaningful content with your personality.)

THE QUESTION: Why come back to blogging?

I’m going to pretend you noticed that I quit, or even care that I’m back. (In another posting, I’ll cover the sibling, and for some the more interesting, question: “why did you stop blogging?”) (Blogging tip #2: leave a teaser early . . . .)

QUICK ANSWER: Blogging been berry, berry good to me. (Baseball, not so good for my Texas Rangers – good or bad, I slip them into this blog.)

Simply stated, blogging jump-started my current professional focus. (Blogging tip #3: . . . and tease often.)

NOT TO BLOG:

This is NOT a blogger

This is NOT a blogger

At first glance (and maybe every glance), blogging appears to be just another selfish, fruitless mound of babbling by lawyers striving, in a quick (and for me, quirky) 90 minute breather, to escape the following (mark your favorite ones – you’re lying if you only mark one):

◊  Keyboard Pounding

◊  Email Grenades (they lob it into my email inbox and run)

◊  Phone call wrestling

◊  Compensation Complaining

◊  Hourly Rate Creeping

◊  Legal Fee Complaining

◊  34/7  workstyle (not a typo)

◊  Teach oung Lawyers; Then they leave; Repeat

◊  What I’d give to not share a Secretary with 3 other lawyers

◊  Billing games (firm policy v. client reality)

◊  Wine’n Dine; Work & Bill; Client Whine; Then Repeat

◊  What I’d give to afford a Paralegal

(Blogging tip #4:  audience participation and engagement; they ARE in the room with you right now.)

Ultimately, however, the evaluation of a blogs is reflected in the frequency of the blog. Infrequent blogging is an “admission against interest” by the blogger. Why should anyone notice or even care, when the blogger doesn’t care enough to regularly blog?

This point is painted best in a story told on The Ticket years ago.  (Blogging tip #5: make it a story; even adults cuddle up to stories.)  The Father-Coach of a YMCA football team (tackle football, of course) was ranting on his 10 year old son for sloppy play. The son looked up (way, way up) to Father-Coach and said:

“Dad, I cain’t hear what yu saying, cuz yu acting so loud (sic).

(So, who is sick in this story?) (Repeat Blogging tip #5: make it a story; even adults cuddle up to stories)

Blogging: love it or leave. Don’t be half-hearted at it.

Your clients recognize a half-hearted effort. Do you ever want to be half-way on anything touching your reputation and your means of income?

TO BLOG

“It’s not just what you know — it’s who knows what you know.” Cordell Parvin

“It’s not just what you know — it’s who knows what you know.” Cordell Parvin

Here are some of the reasons “why” I enjoy and benefit from blogging (no priority order):

  • People: They Want Information

People working at financial services companies want information.  They want it “when” they need it; they need information on demand.  So, make basic information available to them. Be helpful; and in return, they will seek you for help. Over the years, I jump start this by handing out or sending lists of popular blog entries.

  •  People: They Know Me Before I Know Them

Many loan officers know me before I even meet them.  Blogging accelerates relationships – it does NOT replace them.  But, it sure is nice to meet a stranger to me who knows me.

  • People: Earn a Reputation and Meet the Right People

With hundreds of blog posts on a wide range on good lending, bad lending and technology topics, my expertise is “out there” for all to read.  The blog fed my reputation through (i) conversations with reporters, (ii) publishing pieces in industry magazines (including the technology column in the bi-monthly ABA RPTE Section’s eReport), (iii) speaking engagements at law schools, State Bar seminars, industry organizations and financial services companies, and (iv) memberships in important organizations, such the American College of Mortgage Attorneys and the remarkable Association of Life Insurance Counsel (where I co-chair the Communications Committee with the gifted Gretchen Cepek of Allianz Life Insurance Company of North America).

  • Teaching & Constant Learning

I use the blog as a resource in presentations with clients, and within the law firm as a tool to mentor younger lawyers.  Importantly, it keeps me engaged with industry trends and challenges, and positions me with friends and clients as a constant source for new and valuable information.

  • Change: the Conversation

Bloggging changes conversations.  For example, I use listings of the most popular blog entries as conversation starters, giving others the opportunity to share their experiences or perspectives with me.  They tell me what is important to them.

  • Change: It is Personal

Blogging changed me.  I progressed from telling my story, to hearing the client’s needs and then to understanding both the client’s business and the value and uses (current and potential) of our legal work product.  Importantly, I learned that my legal work product was the beginning, not the end.

  • Change: Our Friend

Change.  We often complain of change. As I return to blogging, I return appreciative of the friends who connected with me because of the little blog called Lenders360blog (and it’s predecessor, ToughTimesForLenders). And also I return with many thanks to the attorneys and talented friends at Winstead PC who shared ideas with me; and with special thanks to the gifted Allen Fuqua and Rachel Guy.

  • Change: My New Venture

However, I’m back in a very different role and with a radical focus.  Blogging, listening and learning pointed me to a new venture.  I now manage legal workflow and create tools that lift legal content out of the traditional, manual legal process into a self-service process – a transformed process with rich collaboration, communication and information gathering.  Companies save money.  Companies harvest new value.  Blogging contributed to the insight behind my new venture.

(Blogging tip #6: keep blogs short (400-500 words).  This one is over 1,100 words. Wow. Horrible.)

Please add your thoughts or experiences about blogging by commenting below.

Tough Times for Lenders

Sticks and Stones May Break Your Bones, but Reliance Waivers Can Still Hurt You

Posted in Lender Liability, Reps & Warranties, Tough Times for Lenders, Uncategorized

Last week Regions Bank sued Comerica Bank seeking a declaration that Regions is not liable to Comerica in connection with their $53MM syndicate loan to a plant nursery that went very wrong.  Regions Bank v. Comerica Bank, civil action 3:14-cv-3607, pending in the United States District Court for the Northern District of Texas.

In short:

  • The two banks loaned $53MM (total) to the plant nursery based on allegedly massively fraudulent inventory numbers.
  • The nursery filed bankruptcy and basically everyone apparently got sued for the alleged fraud.
  • Comerica allegedly has been threatening Regions with a lawsuit for misrepresentation or fraud for talking them into the syndicate.
  • Rather than wait for the lawsuit, Regions filed its declaratory judgment action.
  • In the lawsuit, Regions asserts that Comerica contractually waived any reliance on facts or representations that Regions provided to Comerica.  Thus, argues Regions, Regions cannot be liable to Comerica on account of Comerica relying on any information Regions forwarded to Comerica about the borrower.

There are a number of issues related to the lawsuit that are worthy of analysis.  (There are also a number of one-liners about money not growing on trees).  However, as the case is only a week old it provides a good avenue to illustrate the two levels of reliance waivers in Texas.

Money Dino

What kind of waiver am I talking about?  Contracting parties can waive reliance on representations of the other which are not contained in the contract.  It seems straightforward – if the representation is not in the contract, then forget I said (or failed to say) anything prior to signing.  Why the two levels then?

  •  The Basic Waiver: The typical waiver of reliance in a contract will essentially say that the parties waive any reliance on non-contractual representations.  However, the SCOTX has pointed out that such a contractual provision, like any contractual provision, is subject to avoidance for fraud.  Essentially, even if you waive reliance on prior non-contract statements, if someone made a fraudulent misrepresentation that lead to the execution of the contract (without the representation), the contract risks being avoided for fraud.
  • The Super Wavier: On the other hand, the SCOTX recognizes that some parties may contractually agree to waive any reliance non-contractual representations, regardless of how fraudulent they might be, if the parties so intended. Thus, the super waiver.

So, which waiver is in your contract?  It depends on what the Court thinks you meant when you signed the contract (containing the waiver).  Any answer that begins with “it depends” is not a lot of comfort for lender clients and the SCOTX has been somewhat unclear about which is which.

The SCOTX has said that “The contract and circumstances surrounding [the contract’s] formation determine…[how expansive the waiver is]”.  Schlumberger v. Swanson, 959 S.W.2d 171.  The Court goes on to instruct that lower courts should consider the sophistication of the parties, course of dealings and representation by counsel and, importantly, did the parties intend to put a final end to a long running dispute to determine whether the waiver is basic or super.  (Both terms I made up for ease of reading this post so don’t Google them).

I have not parsed through the complaint in the Regions case and Comerica has not yet answered.  Also, I am not opining on the merits of either parties’ positions.  However, the case provides a good excuse to point out that even if two parties waive any reliance on prior representations, in Texas, that waiver may not be enough to waive claims of fraud.  Meaning, the Court may let the case proceed even if a waiver of reliance is contained in the contract regardless of whether the fraud claim is ultimately determined to be without merit.

Lenders should be cautious and deliberate when drafting these waivers of reliance to attempt to remove as much risk as possible that a court will later find that the borrower may sue the lender for fraud.