Volume 5, Issue 4 (Fall 2009)
CASES OF INTEREST:
Guaranties
In re National Energy & Gas Transmission, Incorporated, 492 F.3d 297 (4th Cir. 2007), cert. denied, Liberty Elec. Power, LLC v. Nat'l Energy & Gas Transmissions, Inc., 128 S.Ct. 1445 (U.S. 2008) - Creditor could not allocate payments from a guarantor to interest instead of principal when the effect of such allocation would be to allow a larger claim for principal in the debtor's bankruptcy.
Unique Logistics International (ATL), Inc. v. Fourside Group, LLC, 561 F.Supp.2d 120 (D. Maine 2008) - A guarantor signed a guaranty in connection with a $50,000 loan. The guaranty was not limited to only $50,000 because it provided that the guarantor guaranteed "any" obligations of the primary obligor to the creditor.
Amphibious Partners, LLC v. Redman, 534 F.3d 1357 (10th Cir. 2008) - A lender made a loan to an LLC. The seven members of the LLC guarantied the loan. When the LLC defaulted, one member paid the loan in full and then sought 50% contribution from two of the other members. The court held that the two other members had to pay only a total of 2/7 of the amount of the loan.
Commercial Money Center, Inc. v. Illinois Union Ins. Co., 508 F.3d 327 (6th Cir. 2007) - Insurance policies issued in connection with financing transactions were in essence surety contracts and therefore the insurer could not assert a defense of fraud.
Comment: Although the agreement in question was called an insurance policy, the court looked beyond its name to its substance. Several factors led the circuit court to affirm the district court's decision that the policy was a surety. These included a waiver of defenses, a provision requiring payment to the banks rather than to the insured, and the insurer's right to indemnification from the insured.
UBS AG, Stamford Branch v. HealthSouth Corp., 2008 U.S. Dist. LEXIS 44572 (S.D.N.Y. 2008) - Guarantor could not avoid its obligations using agency principles, because the signatory to the guaranty had actual authority to bind the guarantor, and there was insufficient evidence of fraud or misconduct by the signatory.
Meecorp Capital Mkts. LLC v. Tex-Wave Indus LP, 2008 U.S. App. LEXIS 2619 (5th Cir. 2008) - Summary judgment for lenders on recovery under a guarantee was improper. The guarantee contained language releasing the guarantors if they cooperated/did not interfere with the lenders' foreclosure of the mortgage, and lenders failed to show that there was no factual issue with respect to this provision.
Wheeler v. Bluming, 521 F.3d 1 (1st Cir. 2008) - An alleged oral promise of the secured party to seek recourse from a guarantor only after proceeding against collateral could not be used to contradict the express terms of the guaranty.
Business Bank v. Hanson, 2008 WL 4705172 (Minn. Ct. App. 2008) - A guarantor stated a valid defense of fraudulent inducement by claiming that the creditor assured him that the creditor was "oversecured," that there was "virtually no risk" of collection on the guaranty and that signing the guaranty was a "no brainer," and that the creditor failed to disclose that the principal obligor planned to file for bankruptcy protection.
Acuity v. McGhee Engineering, Inc., 2008 WL 5234743 (Tenn. Ct. App. 2008) - A surety that paid a property owner when a contractor defaulted was subrogated to the owner's rights against the contractor and others, including claims against subcontractors for negligent performance and breach of contract.
Royal Bank of Canada v. El-Bris Ltd., 2008 ONCA 601 (Ont. C.A. 2008) - A president guaranteed his company's $700,000 loan and provided a $700,000 collateral mortgage. The lender increased the loan to $3.5 million. After default, the guarantor paid the lender $700,000. The lender discharged the mortgage but demanded an additional $700,000 under the guarantee. The mortgage and guarantee did not refer to each other, and the mortgage expressly provided that it was taken in addition to any other security and that any recovery under it would not affect the lender's rights to realize on any other security. The court concluded that the documents did not accurately express the parties' understanding and rectified them to reflect that the mortgage was given as security for the guarantee, with the result that the obligations under the guarantee had been discharged.
Comment: This case shows the danger of using standard form documents without considering whether they require adjustment in view of the context in which they are being used.
2015673 Ontario Inc. v. Chorny (2008), 90 O.R. (3d) 208 (Ont. S.C.J. 2008) - Three guaranteed loans became unenforceable when the applicable limitation period expired. The guarantor's liability was held to be co-extensive with that of the primary debtor, with the result that the limitation period applicable to the guarantee lapsed as well and the guarantee was unenforceable.
Comment: It is possible that the result would have been different if the guarantor had executed a contract of indemnity rather than a guarantee. As well, the guarantee in this case may have escaped a co-extensive fate if it had provided that its enforceability would not be affected by the unenforceability of the primary obligation, including by virtue of the expiration of any applicable limitation period.
Real Property Secured Transactions
In re Foreclosure Cases, 2007 U.S. Dist. LEXIS 84011 (N.D. Ohio 2007) - Plaintiffs who could not prove they owned a mortgage had no standing to foreclose on the mortgage. The plaintiffs argued they had standing because they are a "real party of interest" under Rule 17 of the Civil Rules of Procedure. The Court held that Rule 17 can be used to establish standing only when parties have been mistakenly identified or cannot be identified. Thus, in order to have standing, the Court held that plaintiffs must include with the complaint an executed copy of a recorded assignment of the properties to the lender dated prior to the date of filing for foreclosure.
Comment: This case highlights the importance of proper recordkeeping when transferring interests such as mortgages. This case represents a clarification of existing law rather than a substantive change to the law.
In re Nosek, 386 B.R. 374 (Bankr. D. Mass. 2008) - A federal bankruptcy judge in Massachusetts fined an attorney, two law firms, Ameriquest and Norwest/Wells Fargo for incorrectly claiming Ameriquest was the holder of a mortgage in a bankruptcy case. Ameriquest was the originator and former servicer of the loan; Norwest/ Wells Fargo was the holder. The judge imposed sanctions for a baseless filing under rule 9011 of the Federal Rules of Bankruptcy Procedure. Although Norwest/Wells Fargo argued it had not made any filings, had delegated all responsibilities to Ameriquest, and knew nothing about Ameriquest's misrepresentations, the judge held that holders must monitor the actions of servicers.
Comment: The language of the opinion reflected the judge's distaste for some practices in the residential mortgage industry. In particular, the judge characterizes the "link between lender and borrower in the current residential mortgage industry [as] a multiII. layered, tightly-if not hopelessly-entangled ‘assembly line,' the purpose of which seems to be the avoidance of responsibility."
Blue Hills Office Park LLC v. JPMorgan Chase Bank, 477 F.Supp. 2d 366 (D. Mass. 2007) - JPMorgan's loan to Blue Hills, which was secured by a mortgage on real property, was non-recourse, but provided for "springing" full recourse upon certain defaults, including transfer of any interest in the property without JPMorgan's consent. The court held that Blue Hills' settlement of a zoning appeal was directly related to the value of the property and thus constituted a transfer of an interest in the property and therefore was a default giving rise to full recourse.
Secured Equity Financial, LLC v. Washington Mutual Bank, 666 S.E.2d 554 (Ga. Ct. App. 2008), reconsideration denied (2008), cert. denied (Nov. 3, 2008) - A refinancing lender was not entitled to be equitably subrogated to a senior mortgage lien because a buyer purchased the junior mortgage after the senior lien was discharged and before the refinancing mortgage lien was recorded, and thus had no notice of the possible senior lien.
Fraudulent Transfers
Freeland v. Enodis Corp., 540 F.3d 721 (7th Cir. 2008) - As a result of a leveraged buyout, a company issued promissory notes that by their terms were payable only from lawfully payable dividends. The court concluded that the notes were current rather than contingent obligations and rendered the company insolvent because there were no conditions precedent to payment and the company paid interest on the notes. The court further concluded that payments on those notes constituted intentional fraudulent transfers under state law and that later payments might be avoidable preferences or fraudulent conveyances under federal bankruptcy law.
In re AFI Holding, Inc., 525 F.3d 700 (9th Cir. 2008) - A payment to an investor by a debtor who ran a Ponzi scheme is necessarily made with fraudulent intent. However, investor is entitled to a good faith defense and, for that purpose, the investor gave reasonably equivalent value by implicitly relinquishing its claim for restitution. Thus, the investor was protected to the extent that the payment returned his initial investment, but was not protected to the extent the payment represented fictitious profits from the Ponzi scheme.
In re Slatkin, 525 F.3d 805 (9th Cir. 2008) - All payments to investors made by operator of Ponzi scheme and representing profit on their investments are avoidable as fraudulent transfers. The transfers were not insulated from avoidance under Bankruptcy Code § 546(e) as payments by a stockbroker in connection with a securities contract because although the debtor had customers, he was not in the business of effecting securities transactions and therefore was not a
stockbroker.
In re Cyberco Holdings, Inc., 382 B.R. 118 (Bankr. W.D. Mich. 2008) - A secured party's sweep of its debtor's bank accounts did not result in a fraudulent transfer - even though the debtor allowed the sweep in order to continue to deceive its other creditors and continue to operate a Ponzi scheme. Because the secured party had a security interest in the funds even absent the sweeps, the sweeps did not diminish the debtor's estate and thus there was no transfer of an interest in the debtor's property.
In re Plassein International Corp., No. 03-11489KG, Adv. 05-51472 (KG), 2008 WL 1990315 (Bankr. D. Del. 2008) - Fees to investment advisors in connection with LBO transactions might be avoidable as fraudulent transfers. There existed a genuine issue of fact with respect to certain information (indicating that services provided by the investment advisors were duplicative and not negotiated at arm's length), thus summary judgment was inappropriate.
Renn v. F.W. Financial Services, Inc., No. Adv. 05-3115, 2008 WL 2324036 (Bankr. D. Or. 2007) - A transfer of all of the debtor's assets to its secured party in satisfaction of the $130,000 secured obligation was not for reasonably equivalent value and thus was avoidable. The Court found dispositive a combination of factors, including the fact that the debtor's receivables ultimately provided a cash flow of at least $200,000, and that a third party was willing to pay $130,000 for a portion of the collateral that did not include the receivables.
Sudden Service, Inc. v. Brockman Forklifts, Inc., No. 06-15649, 2008 WL 2357724 (E.D. Mich. 2008) - Payments by insolvent corporation to an insider were not avoidable under the Uniform Fraudulent Conveyance Act because the insider's contributions were properly classified as debt, making the transfers payments in partial satisfaction of a debt, and thus for reasonably equivalent value.
Pa D'or Manufacturing Inc. v. Woodland Container Corp., No. 407- 1858, 2008 WL 3836630 (Minn. Ct. App. 2008) - A corporation made a fraudulent transfer of goodwill - valued at $200,000 on its balance sheet - by forming a new company owned by its insiders to service the business's clients.
Donell v. Kowell, 2006 WL 5891527, affirmed by 533 F.3d 762, cert. denied 129 S.Ct. 640 (9th Cir. 2008) - An innocent investor involved in a Ponzi scheme had to return funds as a fraudulent transfer to the extent they were in excess of the investor's investment.
Financial Institutions
Regulatory & tort Claims - Good Faith, Fiduciary Duties, Interference With Prospective Economic Advantage, Libel, Invasion of Privacy
In re SI Restructuring, Inc., 532 F.3d 355 (5th Cir. 2008) - The Court concluded that secured bailout loans by shareholders in the debtor should not be equitably subordinated to unsecured creditors because the trial record contained insufficient evidence of unfair advantage or harm. The court specifically rejected the theory of deepening insolvency.
In re Kreisler, 546 F.3d 863 (7th Cir. 2008) - Equitable subordination is improper if there has been no harm to other creditors. Accordingly, even though conduct of debtors who formed a corporation that purchased a secured creditor's claim at a steep discount may have been questionable, the claim would not be subordinated.
In re Oelkers, No. A06-4054-TLS, 2008 WL 4877149 (Bankr. D. Neb. 2008) - The claim of a secured lender against guarantor might be subject to equitable subordination if secured lender demanded and received collateral from the guarantor while not intending to fulfill its promises to make additional loans to the borrower. See also In re Thurston, No. A06-4055-TLS, 2008 WL 4866180 (Bankr. D. Neb. 2008) (companion case).
Coppola v. Bear Stearns & Co., Inc., 499 F.3d 144 (2d Cir. 2007) - The court determined that a creditor that caused a debtor to cease operations by refusing to fund the debtor's payroll did not act as an employer, as the creditor was not "responsible for operating the business as a going concern." Therefore, the creditor could not be liable to the debtor's employees under the Worker Adjustment and Retraining Notification Act.
Family Home and Fin. Ctr., Inc. v. Fed. Home Mortgage Corp., 525 F.3d 822 (9th Cir. 2008) - Park Place, a mortgage broker, sued FreddieMac for intentional interference with a contract to sell loans to National City, unfair competition and defamation due to Freddie Mac's inclusion of Park Place on its exclusionary list. The court affirmed the grant of summary judgment in favor of Freddie Mac. There was no evidence to support Park Place's claim that Freddie Mac caused National City to end the mortgage broker contract. Freddie Mac had a legitimate business reason for placing Park Place on the exclusionary list.
Bank of New York v. Fremont General Corp., 523 F.3d 902 (9th Cir. 2007) - The Bank of New York filed a complaint against Fremont on several grounds, including conversion and intentional interference with contract, alleging Fremont, the parent company of a workers compensation insurance company, directed the withdrawal of $14 million from custodial accounts in violation of New York Insurance law and the "custodian agreement" between the bank and the insurance company. The Court held that summary judgment was not appropriate as to the claim of intentional interference with the custodian contract. The court noted that evidence existed indicating that Fremont General's general counsel knew of the transfers and knew that they were in violation of the custodian agreement, giving rise to a material issue of fact.
The Renovator's Supply Inc. v. Sovereign Bank, 892 N.E.2d 777 (Mass. App. 2008) - A lender was liable for damages as a result of its failure to renew a credit line without adequate notice and its attempt to force the borrower to agree to more stringent terms by proposing them the day after the existing credit line expired. Based on the facts of this particular case, in the Court's view the lender's course of conduct and current actions suggested to the borrower that the loan would be renewed. The borrower alleged that the failure to renew was particularly damaging, because it came at a time when the borrower needed cash to send its December catalogs to its customers.
Bartlett Milling Co. L.P. v. Walnut Grove Auction & Realty Co. Inc., 665 S.E.2d 478, 66 U.C.C. Rep. Serv. 2d 881 (N.C. App. 2008) - Creditors who sold collateral (cattle) and disbursed the proceeds among themselves, but not to a senior creditor, were found to be liable for conversion. Although the junior creditors attempted to rely on Article 9's enforcement provisions to justify their actions, there was no default with respect to their secured obligations and therefore Article 9's enforcement provisions were not triggered. The decision also includes an interesting discussion of marshalling.
Thabault v. Chait, 541 F.3d 512 (3rd Cir. 2008). - The Court discusses in dicta the availability of the "deepening insolvency" damages theory under New Jersey law without recognizing "deepening insolvency" as a stand-alone cause of action in the instant case.
In re APA Transport Corp. Consol. Litig., 541 F.3d 233(10th Cir. 2008) - An exemption from WARN Act's 60 day employee notice requirement for "faltering companies" "actively seeking financial assistance" is not available where the company takes no action to pursue, and fails to submit a formal request for, funding prior to standard notice deadline.
Henning v. Mainstreet Bank, 372 B.R. 34 (D. Minn. 2007), affirmed 66 U.C.C. Rep. Serv. 2d 922 (8th Cir. 2008) - A guaranty provided that the creditor would release a mortgage when $200,000 of principal had been "paid." The release was not triggered by payment of $124,000 and the creditor's collection of $196,000 more from liquidation of collateral, as the buyers of collateral and account debtors did not "pay" the debt secured by the mortgage within the meaning in the guaranty.
In re Musicland Holding Corp., 374 B.R. 113 (Bankr. S.D.N.Y. 2007), affirmed by 386 B.R. 428 (S.D.N.Y. 2008) - Trade creditors contractually subordinated their security interest to lenders providing a revolving loan. They had no claim against the lenders when the lenders amended their credit facility to include an unrelated term loan by a single lender, as the original loan documents contemplated later amendments and encompassed all types of indebtedness.
In re Dura Auto Sys., 379 B.R. 257 (Bankr. D. Del. 2007) - In interpreting an X-clause in an indenture, the Court read the clause in the context of the whole agreement, the purpose of which was to create only narrow exceptions to subordination provisions.
DCR Fund I, LLC v. TS Family Ltd. Partnership, 261 Fed. Appx. 139 (10th Cir. 2008), on remand 2008 WL 2003198 (W.D. Okla. 2008), cert. denied 129 S.Ct. 47 (U.S. 2008) - An alleged oral agreement by a creditor to forbear from enforcement on a promissory note because, under the Statute of Frauds, the agreement should have been in writing.
In re Repository Technologies, Inc., 381 B.R. 852 (N.D. Ill. 2008) - Bankruptcy Court did not clearly err in concluding that advances by insider above cap on line of credit approved by the debtor's board of directors should be re-characterized as equity rather than debt.
In re First NCL Financial Services, LLC, 396 B.R. 562 (Bankr. S.D. Fla. 2008) - A secured loan that was to be converted to an equity investment upon receipt of regulatory approval could be recharacterized as equity even though the regulatory approval had not been received.
HA2003 Liquidating Trust v. Credit Suisse Securities LLC, 517 F.3d 454 (7th Cir. 2008) - An investment bank that gave a fairness opinion on the proposed purchase of a business that ultimately failed was not liable for gross negligence. The investment bank was contractually entitled to rely on factual projections provided by the client and could not be expected to forecast the future decline in equities markets.
Highland Crusader Offshore Partners, LP v. Lifecare Holdings, Inc., No. CIV.A. 3: 08CV010288, 2008 WL 3925272 (N.D. Tex. 2008) - Lenders in a credit facility had no contract claim against borrowers as a result of the borrowers' offering to other lenders an amendment on better terms than a previously rejected offer. However, even absent a fiduciary relationship, the borrowers may be liable for misrepresentation, as those who voluntarily disclose information must speak the whole truth and must supplement the disclosure if new information makes the original representation misleading.
UnitedHealth Group, Inc. v. Wilmington Trust Co., 548 F.3d 1124 (8th Cir. 2008) - Bondholders could not declare default for borrower's failure to file reports with the SEC where the indenture covenant only required the borrower to deliver copies of the SEC filings "after" the borrower had made the SEC filings, and there was no covenant in the indenture to make SEC filings on time.
Royal Bank of Canada v. Welton, 89 O.R. (3d) 532 (Ont. Superior Ct. 2008) - Ontario court held that inter-bank disclosure of client information in the course of one bank's fraud investigation did not violate constitutional protections against warrantless searches, even though industry-led Bank Crime Prevention and Investigation Office had been granted investigative powers by statute and therefore arguably acting with a form of state authority.
Agent Banks
The Bank of New York v. Mont. Bd. of Invs., [2008] EWHC (Ch) 1594 - In this case (commonly referred to as the "Orion" decision), the High Court of Justice Chancery Division (in London) evaluated the duties of a Security Trustee in a defaulting structured investment vehicle ("SIV"). The case interpreted New York law and was based on the specific language of the Indenture at issue. At issue were the actions a Security Trustee should take when faced with senior noteholders who wanted an immediate sale of the SIV's assets and objecting subordinated noteholders who believed that the assets should not be sold in hopes that the assets value would appreciate. The Court held that the Indenture did not vest in the senior noteholders the right to direct the Security Trustee as to the time, place and manner of the sale of the collateral and that the Indenture did not provide for a specific time of sale of the collateral. The court did not rule on the extent of fiduciary duties, if any, owed by the Security Trustee to either the senior noteholders or subordinate noteholders.
AG Capital Funding Partners, L.P. v. State Street Bank and Trust Co., 896 N.E.2d 61 (N.Y. 2008) - An indenture trustee could be liable for negligence (but not for breach of fiduciary duty) for its failure to perform a non-discretionary, ministerial duty to deliver a registration statement that arguably was necessary for the lenders to have a valid security interest and which failure led to a multimillion dollar loss.
Dahlgreb v. First National Bank of Holdrege, 533 F.3d 681 (8th Cir. 2008) - A bank had no RICO liability to the creditors of one of its former customers because there was no evidence that the bank controlled the customers' activities. However, the bank was liable to those creditors who continued to conduct business with the customer after relying on a misrepresentation by the bank's president that "everything was fine" with the customer, made after the bank had ended its relationship with the customer.
The Bank of New York Mellon v. Realogy Corporation, No. CIV.A. 4200-VCL, 2008 WL 5259732 (Del. Ch. 2008) - Proposed loans under a complicated indenture did not constitute " Permitted Refinancing Indebtedness" and thus the borrower could not enter into the new loans.
Obligations Under Corporate Laws
In re Old Summit Manufacturing, LLC, 523 F.3d 134 (3d Cir. 2008) -Checks received by seller of a business before closing, but which cleared after the closing were not "accounts receivable" at the time of the sale and thus not part of the assets sold. They therefore remained the property of the seller.
Postal Instant Press, Inc. v. Kaswa Corp., 162 Cal. App. 4th 1510, 77 Cal. Rptr. 3d 96 (Cal. Ct. App. 2008) - Creditors were not permitted to pierce the corporate veil to satisfy a shareholder's debt. If a corporation's assets were available to satisfy a shareholder's liabilities, corporate creditors and other shareholders could be harmed.
