In prior posts I have discussed what bit coin is, in terms of describing the technical aspects of the thing.  Bit coin is only one of numerous non-fiat currencies which currently exist, and seems to be the most common.  In this post I will not be focusing on the technical nature of non-fiat currencies, but rather consider what the character of a non-fiat currency is legally.  Stated more directly, is a bit coin legally a currency, security, instrument or something else.

The trick is to realize that there is no coin

Bear with me, because this is a long post.

To state the obvious, bit coin is not a currency in the sense it was issued by a sovereign.  However, non-fiat currency is not unheard of in the world.  You could argue with a straight face that the game tokens at Chucky Cheese are a form of non-fiat currency.  They can be exchanged for value (say a video game or perhaps a trinket) and there is a market to exchange them with others – if you happen to be 10 years old.  But to say that a game token is legally the same thing as a bit coin over simplifies that notion that something which represents value and can be exchanged in necessarily a currency.

In reality, anything can retain value and be exchanged for something else of value.  This is the basis for early barter system economies, such as the Mesopotamian culture.  However, currency has only one imperative, which is to be valuable.  Unlike bartering wheat for timber, a currency cannot be used to make bread or build a house.  Its only purpose is to retain value.

In the United States, this is enough for the criminal justice system to have determined that bit coin is money for the purpose of the various criminal statutes concerning money laundering, purchase of illegal items, and transferring money to conspirators.

On the civil side of the law, the Courts have yet to settle on a definition of its character.  The notion of a bit coin as a currency is, in my opinion, driven by the name itself.  If it was called bit-value, bit-stock, or bit-note the immediate perception might be different.

In fact, some forward thinking companies issue Initial Coin Offerings (an “ICO”) which is similar to an IPO, but instead of shares in the company in the traditional sense, the company will issue “coins” to investors which function more as token on ownership rather than as a fungible currency.  In using an ICO, the coins are tracked with the blockchain technology allowing for the quick and anonymous transfer of the coins instantaneously to anyone anywhere.

These ICO coins are certainly not currency because they act as ownership stakes in a company and, while they hold value and can be exchanges for value, the ICO coin is not fungible with another company’s ICO coin.

By the same token (pun intended), is a bit coin itself fungible?  While one bit coin will equal another bit coin on the exchanges, each bit coin is supremely unique because of its hashing and ownership on the ledger.

Perhaps the hashing is analogous to a dollar bills serial number, but the ownership function on the ledger has no analogous characteristic with currency.   Without the ledger there could not be a decentralized ability to transfer a bit coin from one person to another, and without that ability anything of “value” is really worthless.  It is therefore, I believe, a central element of bit coin that it requires a ledger, which likes the bit coin to the owner’s wallet.

Equally import is that fiat-currencies are backed by the sovereign while bit coin is backed by nothing but the common belief that it has value.

Both of these issues, I think, sets bit coin apart from a currency, which requires no ledger or mechanism to keep track of ownership and (for fiat currency) requires sovereign backing.  While the true owner of the bit coin may remain anonymous, the owner must like his/her wallet and public key to each of his/her bit coin.

What then, if not currency?

As mentioned above, some types of block chained “coins” are much closer to a security than a typical bit coin.  In fact, the SEC has recently ruled that these token type coins from an ICO are regulated.  However, the bit coin (and similar) are not shares of a going concern which will be run primarily by others from which you hope to capture a gain from such operations.

Rather, its value with only the purpose of being value.

If I may, I think that a bit coin is most like a letter of credit payable in a foreign currency.  The obligation of this “bit-letter of credit” would be the bit coin market place.  When a bit coin owner wants to cash out, he/she attempts to convert the bit coin into some sovereign currency, say US Dollars, by selling / assigning that “bit-letter of credit” to a person willing to accept the rights to the “bit-letter of credit”.

The letter of credit analogy is supported by the fact that actual letters of credit can be traded in exchange for value.  And, if you had a letter of credit payable in Yen, but needed US Dollars, you would be subject to the currency fluctuations among the two.

In fact, the Knights Templar, who pioneered the original letters of credit, allegedly used a cipher on the documents to ensure their validity and kept records on their ledgers.  Additionally, these letters of credit were traded as if currency because of the belief in the credit worthiness of the Knights Templar – who were not a sovereign and were specifically not subject to any sovereign by papal bull.

We are still $20 short. Who did not chip in for the tab.

Indeed, the a modern letter of credit can be assigned, and to do so requires notice to the Bank which is recorded on the bank’s ledger.  Additionally, a letter of credit is not backed by the sovereign.

For this reason, I think bit coins are most analogous to a letter of credit in terms of its legal character.

Please feel free to disagree or comment below.  This in an emerging issue and input is appreciated.

It was not too long ago that a lender would consider an oil & gas company as a fairly safe credit.  However, the times are changing.

oil and gas donkey


It is no secret that the current lower gas prices are due to upstream excess production, either domestically (in the US) or in the mid-east.  This has led to much discussion about the financial future of many upstream exploration and production (“E&P”) companies in the near term as well as to the down-stream companies later in time.

As a corollary to that, most folks outside of Texas are likely not aware that a significant portion of the oil patch is serviced by smaller vendors whom you would likely not know by name.  These are the early warning companies that are expected to fail prior to the larger E&P companies.

Despite financing vehicles and hedging (learned from the last downturn, I am told), some of the E&P companies are already filing bankruptcy or seemingly moving in that direction.

  • Recently, Quicksilver Resources, Inc. and affiliates filed chapter 11 in Delaware (case no. 15-10585).   Quicksilver was (and remains) a E&P company based in Fort Worth, Texas.  It lists over $1BB in liabilities as well as over $1BB in assets.  Click here for the press release.
  • Another E&P company, Sabine Oil & Gas Corp. announced last week that it had retained restructuring counsel as well as a financial advisory firm.  Sabine is the product of merger last year with Forest Oil and claims operations in the Eagle Ford Shale, East Texas, North Texas and offshore.  Its last filed 10-K listed closed to $1BB in assets.  Click here for investor info from the Sabine investor page.
  • And finally, another E&P company I will mention is Dune Energy, Inc. based in Houston who filed bankruptcy in early March 2015 in Austin (case no. 15-10336).  Dune claims operations in Texas and offshore.  Its bankruptcy schedules listed $144.2MM in debt against $229.5MM in assets.  Click here for the Form 8-K.

Of course, there are more E&P companies who have filed (or may).  A quick check of the docket for the Western District of Texas appears to show a few of the smaller service companies who have recently filed chapter 11 also.  Most people I speak with in my field believe that we will see more oil & gas restructuring by the end of the year.  While these companies did very well even during the recent recession, as the economy has gotten better and production has increased, these companies are facing serious financial trouble.

Over the last few weeks, I’ve commented on the new version of the OCC’s Commercial Real Estate Lending Handbook (I give it a gentlemen’s C); and I listed a few legal topics that deserve some guidance from the OCC. “Guidance” could even merely be a list of important topics (ending with a warning that the list is NOT an all-inclusive list). I expect legal issues to be identified and put on the “check the box” list by the OCC  – with the banks expect to check the box. The "Blank" List   Unfortunately, instead of leading the class by at least listing legal issues associated with risks in commercial real estate lending, the OCC implicitly affirms those banks that under value and under utilize legal counsel.  (Let’s resist the temptation to comment on “why” this takes place.) Fortunately, some banks are very good at identifying and monitoring legal issues. Several of them do this by a simple two step process:

  1. List key legal provisions in loan documents
  2. Instruct legal counsel to report, in writing AND PRIOR to closing, if these provisions are altered

Here is a sample list (it is NOT an exhaustive or all-inclusive list):  legal counsel must report (in writing) any changes, from the bank’s standard form, in loan document provisions that cover the following –

  • grace period, late charges and default interest
  • prepayment, lockout and yield maintenance
  • transfer restrictions (due on sale) provisions
  • subordinate financing (due on encumbrance provisions)
  • material deviations in, or deletions of, the remedies provisions (unless required under the governing law of the state in which the collateral is located)
  • recourse provisions
  • environmental provisions
  • taxes and insurance premiums escrows
  • any reserves or other escrows
  • granting clauses or form description of collateral contained in such granting clauses (unless required under the governing law of the state in which the collateral is located)
  • casualty or condemnation provisions
  • addition of a provision allowing a release of collateral (unless expressly provided for in the credit approval)
  • lender approval process relating to amendments, renewals or termination of major leases (or new leases)
  • cooperation provisions, including use of any future technology required by lender (such as on-line reporting and delivery of required materials and information)
  • WARNING: __________ [this list is not “all-inclusive” and you should revise it as needed]

My suggestion is that every bank (or other lender) take this approach.  Surely at some point, the OCC will view this simple approach as a key to safe and sound banking practices. Please share you comments below.                

The July 2013 issue of the “Mortgage Banking” magazine focuses on the Consumer Financial Protection Bureau (or “CFPB”).  The coverline  is this: “CFPB – A Powerful New Overseer.” Why my interest in this issue and coverline? In the past, commercial lenders (and their lawyers) blissfully ignored anything involving consumer lending.  We quickly distanced ourselves from any meeting involving discussions of consumer loan documentation, compliance audits, data collection (and access), and the byzantine consumer lending regulations. Residential lending was . . . but not really . . . but really . . . the “other side” of the lending family. This is changing. The residential obsession (on rules, lending policies, data collection and compliance inquiries) will radically change commercial lending.  It is more than a shadow on the wall. In every industry meeting attended by me in the past year, anticipating the impact of the CFPB upon commercial lending is a top-tier topic.  Although not a formal agenda item, the discussions are not “if” this will occur – the discussions are “when?” Leaders (on the commercial lending side) are anticipating the need to adopt some of, if not mirror, the CFPB requirements.  This will require new lending rules and lending policies, with requirements for expansive loan level data, rich data  mining and new compliance policies and procedures – with the ability to alter procedures and generate “new” reports upon demand (or at least quickly). Here are some of the drivers behind extending CFPB principals to commercial lending:

  • Other governmental authorities and industry regulators will perceive value in the CFPB approach (“since they’re digging into this on the consumer side, why aren’t we doing the same on the commercial side?”)
  • Investors will demand similar treatment (“why can’t the commercial side have the same focus on policies, rules, loan level transparency, and all that stuff – which we’re paying for”)
  • Supporting technology tools already are available (“what’s so hard about modifying these new tech tools for commercial investments?”)

No one questions whether the shadow is real. The focus is “when” will the shadow push the residential table into the same room as the commercial table. (Or maybe it’ll be the other way around.) No more distancing ourselves from Cousin Eddy – we’re going to eat a lot of meals together. Please post your comments below.  

As I look around the business landscape, much of the focus of company growth seems to center on leveraging the internet for greater connections (with their trading partners) and for more information (“big data”). It’s a party. My perspective is that lawyers soon will be invited to participate in the party. But right now – despite all of the hype of lawyers as being “important business partner and advisers” –  lawyers are sitting out the dance. Left behind at the curb. Think about all of the investment and energy on this topic, yet so little of it is directed at using technology (what seems to now be a fundamental tool) to achieve greater connection and more information from company lawyers (whether in-house counsel or outside law firms). In the last month, I”ve talked with two significant companies about ways to include lawyers in this fundamental topic. Here is a screen shot of my “mindmap” overview. Questions for you:

  • are you seeing this, too?
  • where is this going?

My perspective is that lawyers soon will be joining the party, and will no longer be left behind at the curb. Please give share your comments below.

The combination of 4 speaking engagements and working on 4 new (or revived) lending products buried me during the last several months.  Fortunately, I’ve navigated the course, and it is a new year.  It is time to take a look back at 2012, and step out with some comments on 2013. New commercial real estate lending started to come back in 2012.  Finally. Here are my observations on the distinctive attributes of this come back, and my prediction of what it will look like in 2013: Lessons from 2012:  

  • Tough Love: Loan documents are longer, and tougher.  Lessons learned from the tough times now are included in many base commercial real estate forms.  (I’ll comment on these in the future.)
  • Rose Colored Glasses: Unfortunately, the “return” of lenders (and liquidity) to the market and the expectation of borrowers looks like this – a train wreck.  Parked in the workout group during the tough times, loan originators return to loan production with fresh memories of tough loans characterized by inadequate underwriting, bad documents and inadequate personal liability.  On the other hand, the strongest borrowers are flush with cash and are willing to place it into the project, with the expectation that the lender will reward the wise decision with reasonable terms and limited personal liability.  These different perspectives collide during negotiations of the loan documents.  It is not pretty.
  • Fewer and Newer:  In comparison to 2007, there are fewer lenders in the market.  However, many “new” lenders are entering into new commercial real estate finance markets.
  • Something for Almost Everybody:  Yes, some real estate products remain tough to finance (office, retail); but over the last half of 2012 I worked on a broad range of commercial real estate –

– unsecured (registered) notes to a regional grocery chain – forms for a new (production) single family builder program (multiple states) – construction loans for senior living projects (multiple states) – permanent loans (multiple states) (office and retail)

Prediction for 2013  

  • More of the same.  Not flood waters more; but a steady, gradual improvement.

Over the next week, I’ll comment on my 2012 experience with distressed commercial real estate, and then the growing (and latent) impact of technology on investing in (and working with) commercial real estate. I hope that 2012 found you improved over 2011. Happy New Year.  

Credit seems to be more available for commercial real estate.  For example, I know of one commercial real estate lender working on a construction to permanent loan program.  This type of lending blends two types of loans: a construction loan to build the project and a term loan to finance it once the project hits certain targets. If implemented correctly, a lender literally will capture market share.  And a borrower can save time and money by closing two loans at one time.  However, it has unique due diligence and documentation provisions, which are different from a construction to perm loan covering a home. In this post and in future posts, we’ll look at a few of these elements and provisions.  Understanding these should help you as you jump into offering or accepting a construction to permanent loan.  And, don’t forget to address or include the “lessons learned” over the past 4 years into the equation!     Some of the unique elements of a construction to perm loan:

  • Survey requirements
    • initial survey
    • foundation survey during construction
    • as-built survey as a conversion (and/or as a final advance condition)
  • Title insurance requirements, such as:
    • mechanics and material mans coverage
    • pending disbursement or down dates on draws
  • Casualty and liability insurance requirements
    • builders risk coverage
    • evidence of coverage by contractor(s)
  • Credit enhancement covering construction risk, such as:
    • Full liability of borrower until rental, loan to value andor debt service coverage thresholds
    • Guaranty of sponsor: full paymentperformance v. completion; and then merely bad-boy events; (one issue: does completion guaranty include merely shell or also tenant improvements?) (another issue: what are the requirements or conditions to migrating the guaranty from a 100% of the loan and project to merely covering bad-boy events?)
    • Letter of credit until rental, loan to value andor debt service coverage thresholds (another issue: how to handle letters of credit from tenants?)

I’ll cover more in future posts. If you have any comments on any of this, please do so below.

Two recent cases are good examples of “why” secured lenders, who hold liens on real property, correctly view bankruptcy court as a very, very, very bad place.  One case has received a lot of attention, including an appeal of the decision and state legislation; and the second bankruptcy ruling was overturned on appeal.

The lessons learned are expansive and expensive:

  • Constant change to form documents (expansive): at least in Illinois, unless a ruling in a recent bankruptcy case is overturned or state law changed, a new mortgage should describe the terms of the mortgage note.  Indeed, a lender should include these terms in every Illinois loan modification; and even consider modifying all of its existing (Illinois) mortgage loans to describe the terms of the mortgage loan.  “Expansive” here means the reach of a bankruptcy court can be very, very, very long.  If your fail to keep your mortgage documents current on events like this, then perhaps . .  . good-bye mortgage.
  • Bankruptcy busts your litigation budget (expensive): James Ruiz recently handled a case where after allowing the mortgage lender to foreclose (pursuant to state law and outside of the bankruptcy), the bankruptcy court ruled that it retained control over the proceeds from the state foreclosure sale.  Eventually, the ruling was over turned, but the time and expense to the mortgage lender made the process . . . expensive.  “Expensive” here means expensive.  If your mortgage loan goes into bankruptcy where results are difficult to predict, then . . . good-bye legal fee budget.

The first bullet point is based on a recent bankruptcy case in Illinois (known as In re Crane, Case No. 11-90592, U.S. Dist Ct. C.D. Ill)  In the case,  the court construed a state conveyancing statute, which takes a permissive approach on disclosing loan terms in a mortgage, to in fact require disclosure of the terms of the loan (including the interest rate).   Based upon this approach, the bankruptcy court ruled that the mortgage loan was avoidable in bankruptcy.  And so, the court struck down the  mortgage.  Good-bye mortgage.

If you find this upsetting, then join the crowd: the case is on appeal, it has received a lot of attention by key mortgage lending organizations, and the state legislature is considering passing a new state statute addressing this problem.

Bottom line: form work on mortgage loan documents will NEVER stop. Expansive.

The second bullet point is a lesson given to me by James Ruiz.  After the bankruptcy court issued a lift stay order permitting a nonjudicial foreclosure sale under state law,  the bankruptcy court held (i) that it had continuing jurisdiction over the proceeds of the nonjudicial foreclosure and (ii) that the bank’s entitlement to interest, fees and expenses under the Note would be governed by bankruptcy law – not the terms of the Note or state law. The bankruptcy court also held the substitute trustee commission would be governed by bankruptcy law – not state law. The bankruptcy court denied the bank’s recovery of its attorney’s fees and the substitute trustee’s five percent commission – notwithstanding the fact that surplus proceeds were generated from the foreclosure sale to pay the mortgage lender in full, the substitute trustee commission and 100% of the other creditor claims against the debtor.

In essence the bankruptcy court ruled that every creditor of the bankruptcy estate would be paid 100% of their claims (including general unsecured creditors), except the mortgage lender and the substitute trustee. Going one more step, the bankruptcy court’s ruling would return surplus proceeds to the debtor after all creditors – other than the mortgage lender and substitute trustee – were paid in full.

The US District Court reversed the bankruptcy court’s ruling and held state law and the loan documents governed the distribution of the foreclosure sale proceeds, not bankruptcy law.  Therefore the mortgage lender and substitute trustee are to be paid in full from the proceeds under the terms of the Note and Deed of Trust.

Bottom line: with good lawyering, good results can happen; but . . . at a price. Expensive.

If you have any comments, or your own story to tell, please comment below.


Answer: badly. The Federal Reserve’s new rule on regulatory capital requirements for banks will be announced in the next couple of days.  It probably will mean less money for commercial real estate. The scope of this new rule will help the banks (by requiring them to hold more in reserve) but it could hurt the commercial real estate community:

  • less money will be available for investing in CMBS bonds, which will . . .
  • impact the demand for CMBS bonds, which will  . . .
  • mean fewer CMBS deals and  thus
  • less money available for borrowing in the commercial real estate sector

  This new rule comes from Section 939A of the Dodd-Frank Act. Clearly, lending secured by commercial real estate now is all about the equity: ownership will to have even more money in the project pocket.  And not borrowed money.  Real money. If you view it differently, or have a comment, please post it below.  

Once upon a time and in a very simple time,  construction lenders required full payment and performance guarantees, and only permanent lenders offered non-recourse financing (with “bad-boy” liability).  Now, even some construction lenders include a variation of non-recourse liability (with “bad-boy” events) in their structure.  And, the list of “triggers” or events that form the basis for liability is growing.  If this trend continues –

  • will the number or bundle of “bad-boy” events be substantial enough to constitute, in a practical sense, the “end” of the non-recourse loan structure?

The time-line seems to say “yes.”

Traditionally, permanent lenders (typically life insurance companies) were the only commercial real estate lenders who incorporated the concept of “non-recourse” liability into their lending product.  In the structure, neither the borrower nor the guarantor (or indemnitor) was liable for the repayment of the loan.  If the project or local market went bad, the lender could obtain title to the property, but could not sue them for recovery of the balance of the loan.

Importantly, the triggers or events for liability were few in number: maybe 6 or 8.

Back in the day, life and liability was simple:

  • construction loan (high risk period since tenants were not paying rent): 100% liability
  • permanent loan (once tenants paying rent, then risk much lower): short list of bad-boy events as the only basis for liability

However, securitization of commercial real estate loans (CMBS) and the recent “down turn” of the economy introduced a much larger set of bad-boy events (Courtney Bristow’s article on dealing with distressed CMBS loans gives a nice over view – it is the #1 download from L360 [and the former TT4L blog]).

I’m confident that the list of bad-boy liability events will continue to grow.  For example, technology issues alone will father more bad-boy events.  (Take a look at my other posts.)

The non-recourse (bad-boy) liability structure is becoming form over substance.

If you view this differently, or want to give me a course correction, please comment below.