Guaranties And Subordination Agreement

Freibert v. Merrill Lynch Bus. Fin. Servs., 230 Fed. Appx. 531 (6th Cir. 2007) (unpublished opinion) – A secured party did not owe a fiduciary duty to a third party who pledged securities to secure a loan. The secured party was not liable to the third party for allowing another pledgor to withdraw assets from his own pledged securities account.

Lavender v. Bunch, 216 S.W.3d 548 (Tex. App. 2007) – A guarantor who performed its guaranty by purchasing the guarantied note from the creditor was entitled to contribution from co-guarantors in proportion to their number, but not entitled to full payment from them.

Irish v. Woods, 864 N.E.2d 1117, 62 U.C.C. Rep. Serv. 2d 607 (Ind. Ct. App. 2007) – A co-maker of a note was an accommodation party (UCC § 3-419) and, therefore, had a right of recourse against the other maker. The co-maker was not entitled to contribution from a guarantor because the guarantor was a subsurety, not a co-surety. Restatement of Suretyship § 59, Comment A.

Beal Sav. Bank v. Sommer, 865 N.E.2d 1210 (N.Y. 2007) – Individual creditors under a credit facility did not have the right to pursue a direct action against guarantors of the debt without authorization from a super majority of creditors under the terms of the credit facility.

CCP Ltd. P’ship v. First Source Fin., Inc., 856 N.E.2d 492, 494 (Ill. App. Ct. 2006) – Owners of a corporation guaranteed an indefinite series of revolving loans made to the corporation by a bank. The court construed this “Last Out Participation Agreement” as a continuing guaranty that could be revoked under Illinois law.

GECC v. Lanmann, 2006 U.S. Dist LEXIS 50291 (S.D. Ohio 2006) – A provision in a guaranty stating that the guarantors had “unconditional” liability did not constitute a waiver of guarantor’s affirmative defenses.

Farmers Bank of Hamburg, Ark. v. USDA, 495 F.3d 559 (8th Cir. 2007) – A lender that did not investigate the borrower’s finances could not collect from the guarantor because the guarantee provided a defense for improper servicing of the loan.

In re Big Idea Prods., Inc., 372 B.R. 388 (Bankr. N.D. Ill. 2007) – A bankruptcy trustee and a surety of a bond both claimed the right to restitution of the bond. The court held that the surety was entitled to full recovery of bond under principles of subrogation.

Wagner v. Giles, 209 S.W.3d 489, 61 U.C.C. Rep. Serv. 2d 335 (Ky. Ct. App. 2006) – A note was paid and the payment was then recovered as a preference under the Bankruptcy Code. The fact that the payment was recovered meant that the note was not discharged and that the co-makers were again liable on the note to the extent that the payment was a preference.
Commercial Money Ctr., Inc. v. Ill. Union Ins. Co., 508 F.3d 327 (6th Cir. 2007) – The court analyzed differences between surety contracts and insurance contracts. An insurer generally does not have a right of subrogation against its insured, while suretyship confers rights of recourse of the surety against the principal.

Atl. Nat’l Servicing Co., LLC v. Anderson, 2007 WL 583329, 62 U.C.C. Rep. Serv. 2d 108 (D. Utah 2007) – Guarantors of a loan did not sufficiently tender payment of the loan because the creditor had instructed them to tender payment to a specific person at the creditor but instead the guarantors tendered the payment to the attorney for the creditor.

Irish v. Woods, 864 N.E.2d 1117, 62 U.C.C. Rep. Serv. 2d 607 (Ind. Ct. App. 2007) – An LLC signed a promissory note. Two owners of the LLC cosigned the note. The court concluded that as between the creditor and the two owners, the two owners were primarily liable. However, as between the LLC and an owner, the owner was an accommodation party and had recourse against the LLC. UCC § 3-419.

Inter-Am. Dev. Bank v. Nextg Telecom Ltd., 503 F. Supp. 2d 687, 691, 694-95 (S.D.N.Y. 2007) – A corporation borrowed money, for which one requirement was that the shareholders sign an indemnity agreement under which they agreed that they would not “permit, authorize, or otherwise cause” the corporation to default. The shareholders said that as minority shareholders they had no power to “permit” the default. The court held that the shareholders would have had power to influence the corporation to comply with the loan agreement. Therefore, they “permitted” the default because they did not take any action to “prevent” the default.

Dorf v. Knitmedia Inc., 16 Misc. 3d 1126(A) (Table), 2007 WL 2376813 (N.Y. Sup. Ct. 2007) (unpublished opinion) – A note provided that the rights under the note were subordinated to certain defined “senior indebtedness.” The note did not contain a “stand still” provision. Thus, when the obligor went into default, the holder of the subordinated debt could bring an action to enforce the debt but had to defer any collection until the holder of the senior debt was paid in full.

In re Dura Auto. Sys., Inc., 379 B.R. 257 (Bankr. D. Del. 2007) – A court interpreted an “X-clause” (subordination provision), which permitted holders of subordinated debt to participate in bankruptcy distributions in some circumstances. The court interpreted the clause in the overall context of the transaction and concluded that the subordinated debt could not receive a distribution unless the senior debt was paid in full. The court used the American Bar foundation’s Model Debenture Indenture Provisions for interpretative assistance.

In re Enron Corp., 379 B.R. 425 (S.D.N.Y. 2007) – A transferee of a claim for which the original holder engaged in activity that would justify the subordination of that holder’s claim, takes free of the subordination if the transfer is a “sale,” but not if the transfer is a “pure assignment.” Bankruptcy Code § 510(c).

Fradulent Transfers

In re Iridium Operating LLC, 373 B.R. 283 (Bankr. S.D.N.Y. 2007) – The public markets are a better guide in valuing a company for fraudulent transfer purposes than opinions of litigation experts whose valuation work is performed after the fact and from an advocate’s point of view.

In re Edgewater Med. Ctr., 373 B.R. 845 (Bankr. N.D. Ill. 2007) – The expiration of purchase option is not a “transfer” of property for the purpose of fraudulent transfer law.

Glimcher Supermall Venture, LLC v. Coleman Co., 2007 SD 98, 739 N.W.2d 815 (S.D. 2007) – A corporation paid down debt to a related corporation just before it discontinued operations. The payment of the debt owed to the related corporation was not reasonably equivalent value for purposes of the fraudulent transfer laws from the perspective of other creditors.

In re Ohio Bus. Machs., Inc., 2007 Bankr. LEXIS 133 (B.A.P. 6th Cir. 2007) – The court concluded that a payout to a lender on a warrant from proceeds of a new loan from a refinancing lender was a fraudulent transfer. In its analysis, the court evaluated parent-subsidiary relationships and the availability of earmarking for fraudulent transfers.

VFB LLC v. Campbell Soup Co., 482 F.3d 624 (3d Cir. 2007) – A subsidiary could not assert a claim against its former parent that its spinoff was a fraudulent transfer because the exchange for value was reasonably equivalent. The value of a subsidiary spun off in a restructuring transaction is based on its market capitalization for purposes of determining whether there was “reasonably equivalent value” for purposes of a fraudulent transfer analysis. Also, the directors of a wholly-owned, solvent subsidiary who were also directors of the parent corporation did not owe a duty of loyalty to the subsidiary as against the parent. The subsidiary’s directors’ duty was to the parent as the sole shareholder.
In re Manhattan Inv. Fund Ltd., (reversed, in part, by 2007 WL 4440360 on other grounds) 359 B.R. 510, 516, 525 (Bankr. S.D.N.Y. 2007) – The court held that margin payments made by an investment fund whose manager operated a Ponzi scheme to its broker were fraudulent transfers. The investment fund had a prime brokerage account with a securities broker, which saw significant trading activity in the months leading up to the investment fund’s bankruptcy. As a result of those trades, the broker received asset transfers including margin calls, proceeds on short sales of stock, and compensation payments. The court noted that under the “stockbroker defense” found in Bankruptcy Code § 546(e), the transfers to the broker could only be recovered if they involved actual fraud – not constructive fraud. On that point, the court concluded that because the transaction involved a Ponzi scheme, it could infer actual fraud in each transaction.

Comment: While the District Court affirmed the Bankruptcy Court’s decision regarding actual fraud in a Ponzi scheme, the court found there was a genuine issue of material fact as to the brokerage firm’s good faith defense.

In re Reg’l Diagnostics, LLC, 372 B.R. 3 (Bankr. N.D. Ohio 2007) – The court concluded that the bankruptcy of a debtor after a leveraged buy-out was inevitable due to the wrongdoing of the defendants. In its analysis, the court evaluated multiple claims, including fraudulent transfers, breach of fiduciary duty, and equitable subordination all of which related to the failed leveraged buy-out.

In re Manhattan Inv. Fund Ltd., (reversed, in part, by 2007 WL 4440360 on other grounds) 359 B.R. 510, 516, 525 (Bankr. S.D.N.Y. 2007) – The court held that margin payments made by an investment fund whose manager operated a Ponzi scheme to its broker were fraudulent transfers. The investment fund had a prime brokerage account with a securities broker, which saw significant trading activity in the months leading up to the investment fund’s bankruptcy. As a result of those trades, the broker received asset transfers including margin calls, proceeds on short sales of stock, and compensation payments. The court noted that under the “stockbroker defense” found in Bankruptcy Code § 546(e), the transfers to the broker could only be recovered if they involved actual fraud – not constructive fraud. On that point, the court concluded that because the transaction involved a Ponzi scheme, it could infer actual fraud in each transaction.

Comment: While the District Court affirmed the Bankruptcy Court’s decision regarding actual fraud in a Ponzi scheme, the court found there was a genuine issue of material fact as to the brokerage firm’s good faith defense.

In re Reg’l Diagnostics, LLC, 372 B.R. 3 (Bankr. N.D. Ohio 2007) – The court concluded that the bankruptcy of a debtor after a leveraged buy-out was inevitable due to the wrongdoing of the defendants. In its analysis, the court evaluated multiple claims, including fraudulent transfers, breach of fiduciary duty, and equitable subordination all of which related to the failed leveraged buy-out.

UCC—Sales And Personal Property Leasing

Scope

Rogers v. Dow Agrosciences, LLC, 2006 WL 3147393, 61 U.C.C. Rep. Serv. 2d 234 (W.D. Va. 2006) – Article 2 applies to a transaction if the “predominant purpose” of the transaction is the supplying of goods as opposed to the supplying of services. Here, the contract called for the party to spray insecticide on crops from an airplane. The court held that further evidence was necessary to determine the transactions “predominent purpose.” UCC § 2-102.

J&B Sausage Co. v. Dep’t of Mgmt. & Budget, 2007 WL 28409, at * 2, 61 U.C.C. Rep. Serv. 2d 677 (Mich. Ct. App. 2007) (unpublished opinion) – A contract was “predominantly” a sale of services and not a sale of goods where a food processor received pork, processed it into sausage, and then returned it to the person who had supplied the pork. At no time did the processor become the owner of the pork. UCC § 2-102.

Wagner-Meinert, Inc. v. EDA Controls Corp., 2007 WL 579668, at * 2 (6th Cir. 2007), cert. denied, --- S. Ct. ----, 2008 WL 423570 (2008), 62 U.C.C. Rep. Serv. 2d 167 (6th Cir. 2007) (unpublished opinion) – A contract provided for the sale of an ammonia detection equipment system for $13,228. The price included $600 for “on site startup assistance.” The court held that the “predominant purpose” of the contract was the sale of goods and, therefore, UCC Article 2 applied to the transaction. UCC § 2-102.
In re Enron Corp., 367 B.R. 384, 62 U.C.C. Rep. Serv. 2d 628 (Bankr. S.D.N.Y. 2007) – Article 2 of the UCC did not apply to a transaction because the transaction primarily involved the provision of services and not the sale of goods. However, the court still applied UCC § 2-719 because the parties had briefed the case as if that section applied.

Weiss v. MI Home Prods., Inc., 877 N.E.2d 442, 63 U.C.C. Rep. Serv. 2d 897 (Ill. App. Ct. 2007) – The buyers of a townhouse did not have an express or implied warranty action against the seller of windows that had been installed in the townhouse at the time the townhouse was built. The windows had become part of the real estate and were no longer goods when the buyer acquired the townhouse. UCC § 2-105.

Am. Mint LLC v. GOSoftware, Inc., 2005 WL 2021248, 61 U.C.C. Rep. Serv. 2d 729 (M.D. Pa. 2005) – The parties to a contract did not affirmatively opt out of the Convention for the International Sale of Goods by including a general choice of law clause providing for the application of the law of a state.

Wachter Mgmt. Co. v. Dexter & Chaney, Inc., 144 P.3d 747, 61 U.C.C. Rep. Serv. 2d 150 (Kan. 2006) – The sale of computer software is treated as the sale of “goods” under UCC Article 2. Thus, any incidental sale of services to accompany the “goods” is also treated under UCC Article 2.

Bradley v. Google, Inc., 2006 WL 3798134, 61 U.C.C. Rep. Serv. 2d 682 (N.D. Cal. 2006) – Article 2 of the UCC does not apply to a contract for services consisting of advertising on the Internet.

Sys. Am., Inc. v. Rockwell Software, Inc., 2007 WL 218242, 61 U.C.C. Rep. Serv. 2d 933 (N.D. Cal. 2007) – A contract providing for the development of custom software was not a contract for the sale of “goods” subject to UCC Article 2. UCC § 2-102.

Great N. Ins. Co. v. ADT Sec. Servs., Inc., 517 F. Supp. 2d 723 (W.D. Pa. 2007) – Article 2 did not apply to a contract between a customer and a company that provided maintenance and repair services to a system upon request. The agreement predominantly provided for the rendering of services; materials were merely incidental to the repair work performed.

Sys. Unlimited, Inc. v. Cisco Sys., Inc., 228 Fed. Appx. 854 (11th Cir.), cert. denied, 128 S. Ct. 209 (2007), 62 U.C.C. Rep. Serv. 2d 951 (11th Cir. 2007) (unpublished opinion) – The parties entered into an agreement for the transfer of intellectual property rights, but the agreement did not require the transferor to deliver the software related to those rights. The court held that UCC Article 2 does not apply to a sale of intellectual property. UCC § 2-102.

Contract Formation & Modification: Statute of Frauds, “Battle of the Forms”; Contract Interpretation; Title Issues

Lindholm v. Brant, 925 A.2d 1048, 1059, 63 U.C.C. Rep. Serv. 2d 431 (Conn. 2007) – The owner of Andy Warhol’s “Red Elves” entrusted the painting to a respected art dealer for exhibition. The art dealer sold the painting. The court held that the case turned on UCC § 2-403(2) regarding entrusting and buyers in the ordinary course. If the buyer observes customary practices, absent “severe doubt” as to merchant seller’s ownership of art, the failure to obtain documentary evidence of ownership did not prevent the purchaser from being a buyer in ordinary course.

Associated Home & RV Sales, Inc. v. R. Vision, Inc., 2006 WL 4109674, 62 U.C.C. Rep. Serv. 2d 180 (D.N.M. 2006) (unpublished opinion) – A pre-printed logo on a form did not function as a “signature” on the form. UCC §§ 1-201 and 2-201.

BCH Am., Inc. v. DEKO Int’l Co., Ltd., 2007 WL 448868, 62 U.C.C. Rep. Serv. 2d 99 (Conn. Super. Ct. 2007) (unpublished opinion) – A confirmation sent by fax was sufficient to accept a purchase order for purposes of determining jurisdiction.