2011 Commercial Law Developments

V. Lender and Borrower Liability

A. Regulatory and Tort Claims – Good Faith, Fiduciary Duties, Interference With Prospective Economic Advantage, Libel, Invasion of Privacy

  • NML Capital v. Banco Central de la Republica Argentina , 414 Fed. Appx. 514 (2d Cir. 2011) – Funds in an account of the Central Bank of Argentina could not be attached under FSIA. The funds were held at the Federal Reserve Bank of New York. FSIA provides rules for the “attachment, arrest and execution of foreign state property”. The court held that in this case, the funds were those of the Central Bank – not the government of Argentina that had defaulted on bonds. The court rejected suggestions that the level of independence of the central bank from the government should determine whether the funds were subject to attachment
  • TCF National Bank v. Bernanke, 643 F.3d 1158 (8th Cir. 2011) – Rejecting an attempt to enjoin enforcement of Dodd-Frank's limits on interchange fees for processing debit card transactions (the “Durbin Amendment”) because the plaintiff was unlikely to prevail on a claim that the provision was unconstitutional.
  • People's United Bank v. Wetherill Associates , 2011 WL 383740 (Conn. Super. Ct. 2011) – Directors of a corporation do not owe creditors a fiduciary duty, regardless of the corporation's solvency. Thus, a supplier had no cause of action against a secured party that allegedly took control of the debtor for either breach of fiduciary duty or aiding and abetting such a breach. The supplier had no claim against secured party for equitable subordination because such a claim is restricted to bankruptcy proceedings. However, the supplier had pled a claim for tortious interference with business relations by alleging that the secured party interfered with the supplier's relations with the debtor when the secured party took control of the debtor and refused to pay the supplier what it was owed. Creditor also pled a claim for failing to conduct a commercially reasonable disposition due to the secured party's haste in conducting the sale. The supplier's claim that the sale was an avoidable transfer for less than reasonably equivalent value would not be stricken because whether sale was non-collusive - and therefore immune for avoidance - is a question of fact not appropriate to resolve on a motion to strike.
  • Sequel Capital, LLC v. Pearson , 2011 WL 4398108 (N.D. Ill. 2011) – A trustee who received assignment for benefit of creditors could not have breached a fiduciary duty by failing to determine the value of the inventory or by compromising an action against an account debtor after the senior secured party took control over the assets.
  • Wells Fargo Bank v. LaSalle Bank , 2011 WL 2470635 (N.D. Ill. 2011) – A claim against originator and seller of commercial mortgage loans for breach of warranties that the origination met industry standards and that property appraisals satisfied the guidelines in FIRREA was dismissed because it failed to put the originator on notice of what conduct deviated from industry standards or the reasons why the appraisals violated FIRREA.
  • Wells Fargo Bank v. Lake of the Torches Economic Development Corp. , 658 F.3d 684 (7th Cir. 2011) – A trust indenture used to finance tribal casino was void for lack of advance approval by the National Indian Gaming Commission because the indenture, taken as a whole, constituted a management contract due to the fact that it: (1) required that casino gross revenues be deposited daily in a deposit account controlled by the trustee, subject to many conditions on allocation and disposition; (2) required bondholder consent prior to certain capital expenditures; (3) allowed the bondholders to require the corporation to employ an independent management consultant if the debt service ratio fell below a specified level; (4) limited the tribal corporation's ability to replace executive management without the prior consent of the bondholders; and (5) upon default, allowed the bondholders to require the corporation to hire new management.
  • In re Southern Golf Partners, LLC , 452 B.R. 306 (Bankr. N.D. Ga. 2011) – A borrower whose secured line of credit from a bank was assigned to another institution after the FDIC took over the bank had no cause of action or defense against the assignee for the bank's failure to honor its commitment on two letters of credit because only the line of credit was assigned, not the commitment agreement. The two arrangements were not “inextricably intertwined.”
  • Synectic Ventures I, LLC v. EVI Corp. , 251 P.3d 216 (Or. Ct. App. 2011) – Because the manager of creditor LLCs had actual authority to act on the creditors' behalf, an amendment to a loan agreement that manager executed with respect to a loan made to the manager's unrelated business was binding on the creditors.
  • In re National Century Financial Enterprises, Inc. , 783 F. Supp. 2d 1003 (S.D. Ohio 2011) – An investment bank that assisted a debtor and its special purpose subsidiaries in fraudulently marketing investment grade notes could not be liable to a trust that succeeded to the debtor's causes of action because the fraud of the debtor's principals, who controlled the debtor, was chargeable to the debtor and therefore the debtor was in pari delicto with the investment bank. Prepetition payments to the investment bank were not avoidable preferences or fraudulent transfers because the investment bank was fully secured.
  • Finn v. Centier Bank , 2011 WL 4036107 (N.D. Ind. 2011) – A bank that purchased an entire loan from originator who was engaged in a Ponzi scheme. The originator oversold participations and, as servicer, paid off earlier investors with funds received from later investors. The bank was not liable to disgorge payments subsequently received because the loan was real, the borrower paid the debt to the originator, and the originator held those funds in trust for the bank. The fact that the originator had commingled the funds with other monies before paying the bank was immaterial.
  • Costello v. Grundon , 2011 U.S. App. LEXIS 13129 (7th Cir. 2011) – Employees who borrowed money to buy an employer's shares pursuant to an employer–guaranteed plan could allege violations of Regulations U and G (providing limits on loans secured by shares) as affirmative defenses to repayment.
  • Auto. Fin. Corp. V. Joliet Motors, Inc., 2011 U.S. Dist. LEXIS 1067 (N.D. Ill. 2011) – The court pierced veil under Illinois law where personal and corporate assets and liabilities were intertwined. The court found that a failure to pierce the corporate veil would promote fraud, injustice or inequity.
  • Harris N.A. v. Acadia Invs. L.C., 2010 U.S. Dist. LEXIS 121565 (N.D. Ill. 2010) – The Illinois Credit Agreement Act precluded an oral agreement to create credit documents, even though some loan funds allegedly were used by hedge fund members for personal expenses.

B. Obligations Under Corporate Laws

  • Salmons, Inc. v. First Citizens Bank & Trust Co. , 2011 WL 4738656 (E.D. Va. 2011) – A borrower had a claim for unfair and deceptive practices against a bank. The bank, in an apparent effort to obtain additional collateral and after having already made several loans to the borrower to meet certain margin calls, inserted in the final loan and security agreement a new condition that prohibited the use of loan funds for margin calls and failed to disclose that condition, while knowing that the borrower's purpose for the funds was to satisfy margin calls.
  • Sanders v. Ohmite Holding, LLC , 17 A.3d 1186 (Del. Ch. Ct. 2011) – A creditor had a security interest in 7.75% of membership units in LLC and later received a complete assignment of those units and became a member. The creditor subsequently discovered that the units have been diluted to 0.000775% of the total units. The credit was entitled to inspect the books and records of the LLC for the period in which the dilution occurred. Nothing in the LLC agreement restricted members' rights to inspect records, the creditor had a proper motive – investigating a possible breach of the duty of loyalty – and members were not limited to inspecting books and records solely for the period in which they were members.
  • Kirzhner v. Silverstein , 2011 WL 4382560 (D. Colo. 2011) – A state statute that provided that corporate officers and directors “shall not have any fiduciary duty to any creditor of the corporation arising only from the status as a creditor” was not so clear as to abrogate a common-law rule that officers and directors do have a fiduciary obligation to creditors when the corporation is insolvent.
  • Alcorn, Ltd. V. Smeding, 53 Bankr. Ct. Dec. 223 (9th Cir. 2010) – California law does not recognize a general alter ego theory in which a shareholder is liable for the debts of a corporation.

C. Borrower Liability

  • Timothy v. Keetch , 251 P.3d 848 (Utah Ct. App. 2011) – A debtor who falsely represented to a prospective lender that a horse owned by the debtor was owned free and clear could be liable to the lender for fraud as well as breach of contract. This was so even though a simple search for UCC filings would have revealed that the horse was encumbered. Reasonable reliance does not require a check of the public records.

D.  Disputes Among Creditors and Intercreditor Issuer

  • American Bank of St. Paul v. TD Bank , 2011 WL 1810643 (D. Minn. 2011) – A bank that learned of borrower's insolvency and fraud through its own investigation, and not through its relationship with the borrower, had no duty to disclose that information to syndicate formed to provide take-out financing. By releasing its security interest in shares of stock so that the syndicate would have senior interest, the bank did not represent that the stock had value. However, the bank may have aided and abetted the borrower's fraud by releasing its security interest and purchasing a share of the take-out loan to enable the take­out loan to close when it knew of the borrower's fraud.
  • Liberty Media Corp. v. Bank of New York Mellon Trust Co. , 2011 WL 1632333 (Del. Ch. Ct. 2011) – An indenture term that prohibited an obligor from transferring substantially all of its assets unless the successor entity assumed the obligations under the indenture would not be violated by a proposed split-off of certain assets. The assets were admittedly not, by themselves, substantially all of the obligor's assets. The split off would not be aggregated with three previous transactions under the “step-transaction doctrine” because none of the four transactions was connected contractually to any of the others, each of the transactions was a distinct corporate event separated from the others by a matter of years, and the obligor had not pursued a unified disaggregation strategy with a sufficiently well-defined starting point or a sufficiently definitive end result to warrant applying the step-transaction doctrine.
  • Sumitomo Mitsui Banking Corp. v. Credit Suisse , 933 N.Y.S.2d 234 (N.Y. App. Div. 2011) – The court denied summary judgment on whether a loan administrator received a “cash distribution,” which had to be paid to participants, or a “non-cash distribution,” which could be distributed in kind, when the debtor refinanced its obligations.
  • ZBD Constructors, Inc. v. Billings Generation, Inc. , 2011 WL 1327144 (S.D.N.Y. 2011) – A subordinated creditor could not bring a declaratory judgment action against the debtor to determine the amount of interest owing on the subordinated loan because the intercreditor agreement required the subordinated creditor to obtain the consent of the senior lenders before commencing any action relating to the subordinated debt and compliance with this condition was not rendered impossible – merely difficult and expensive – by the fact that the senior debt had been resold to thousands of bondholders all over the world.
  • Asbury Carbons, Inc. v. Southwest Bank , 2011 WL 1086067 (E.D. Mo. 2011) – A creditor that agreed to subordinate its loan to another lender's loan, up to a maximum of $8 million, stated a claim for breach against lender for lending in excess of $8 million and then, after the debtor's default, blocking the debtor's payment to the creditor.

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