2012 Commercial Law Developments
V. U.C.C. -- Lender and Borrower Liability
A. Regulatory and Tort Claims -- Good Faith, Fiduciary Duties, Interference With Prospective Economic Advantage, Libel, Invasion of Privacy
- In re Adam Aircraft Industries, Inc., 2012 WL 646273 (Bankr. D. Colo. 2012) -- In a prepetition forbearance agreement, the debtor released all claims against the secured party arising from the credit agreement or the secured party's conduct. The release did not preclude third-party creditors from pursuing causes of action under the Bankruptcy Code that inuring to the benefit of unsecured creditors. Thus the release did not preclude the trustee from pursuing a claim for equitable subordination based on the secured party's refusal to fund the entire loan pursuant to the commitment letter and its declaration of default under the credit agreement for "technical" defaults without providing the debtor an opportunity to cure.
- Gaia House Mezz, LLC v. State Street Bank and Trust Co., 2012 WL 1530385 (S.D.N.Y. 2012) -- A bank agreed, subject to certain conditions, to waive $4.5 million in accrued interest to induce a borrower to complete a project and pay off a loan. The lender could not, after the borrower fully performed, rely on the fact that those conditions had not for a time been satisfied. The bank's conduct violated the duty of good faith. The court held that the bank was equitably estopped by its silence for months while the borrower continued to perform, and equitable principles prohibit such a forfeiture.
- In re Singer, 469 B.R. 293 (Bankr. W.D. Wis. 2012) -- A bank entered into a forbearance agreement with debtors, which permitted partial payments for six months. The agreement did not expressly indicate when the deferred payment amounts would be due. The court construed the agreement against the bank, which had drafted it. As a result, the deferred payment amounts fell under the "due on maturity" clause of the loan agreement, not the clause providing that acceptance of partial payments does not constitute a waiver of the bank's rights and remedies, and thus were not due until the end of the loan term.
- FH Partners, LLC v. Complete Home Concepts, Inc., 2012 WL 4074530 (Mo. Ct. App. 2012) -- An entity contracted with the FDIC to purchase a loan participation that the FDIC had previously sold to a different buyer. The entity did not acquire any interest even though the FDIC attempted to cure the defect by contracting with the other buyer to reacquire the participation interest retroactively to immediately before the second sale. It was not shown that both parties intended the transaction to be retroactive and, even if they had, retroactive effect between the parties, it would not have affected the rights of a third party so as automatically to give the second buyer rights in the participation interest.
- Wells Fargo Bank v. Baker, 139 Cal. Rptr. 3d 502 (Cal. Ct. App. 2012) -- The National Bank Act preempts a state law that requires a foreign corporation, but not resident of the state, to obtain a certificate of authority to transact business in that state before using substituted service. Accordingly, a national bank may acquire personal jurisdiction over a defendant using substituted service even if the bank lacks such a certificate.
- Am. Bank of St. Paul v. TD Bank, N.A., Civil No. 09-2240 ADM/TNL, 2011 U.S. Dist. LEXIS 49646 (D. Minn. May 9, 2011) -- A bank sued a secured bank, arguing the second bank was partially liable for damages that the first bank incurred under loans to the promoter for music "legends" ‘N Sync and Backstreet Boys. The second bank was the original lender to the promoter and, after having discovered suspicious accounting and other information, declared the loan in default. The first bank was the "servicing lender" in a new facility to buy out the second bank. The second bank, although it ultimately purchased a small share of the new deal, allegedly did not disclose the negative information it had on the promoter. On summary judgment, the court rejected the first bank's claims for fraud by omission, fraudulent misrepresentation, breach of contract and breach of duty of good faith and fair dealing. It refused to dismiss claims against the second bank for aiding and abetting and conspiracy, citing the need for further fact finding.
- Oddco Asset Management v. Barclays Bank PLC, 2012 WL 2399815 (N.Y. 2012) -- The collateral managers for an SIV-Lite transaction did not have any fiduciary duty to noteholders.
- Lotsadough, Inc. v. Comerica Bank, 2012 WL 5258300 (E.D. Mich. 2012) -- A loan applicant granted to its prospective landlord a security interest in all of its business assets, including its liquor license. The tenant/applicant was unable to provide the prospective lender with a first-priority security interest in those assets. The tenant/applicant did not have a cause of action against the prospective lender for refusing to make the loan because the term sheet signed by the applicant made the loan expressly subject to documentation satisfactory to the lender and other loan documents required the applicant to represent and warrant that the collateral was not and would remain not subject to any other security interest.
B. Obligations Under Corporate and Securities Laws
- In re BankAltantic Bancorp, Inc. Litigation, 39 A.3d 824 (Del. 2012) -- A bank holding company's proposed sale of a bank constituted a sale of "all or substantially all" of its assets, but the buyer had not agreed to assume the holding company's debts, the proposed sale violated contractual covenants of the holding company and would be enjoined.
- Dawson v. Pittco Capital Partners, L.P., 2012 WL 1564805 (Del. Ch. Ct. 2012) -- The members of an LLC also held secured notes. The members could not be forced to surrender the notes in connection with a merger to which they objected because the LLC agreement did not unambiguously provide for a mandatory capital contribution in connection with an approved merger. Consequently, the notes survived the merger, as did the security interest.
- Retirement Board of the Policemen's Annuity & Benefit Fund v. Bank of New York Mellon, 2012 WL 1108533 (S.D.N.Y. 2012) -- Certificates issued under a pooling and servicing agreement for mortgage-backed securities are debt, not equity, and are therefore subject to the Trust Indenture Act. The investors stated a claim against indenture trustee for failing to require the master servicer to cure, substitute, or repurchase defective loans.
- Oddo Asset Management v. Barclays Bank PLC, 973 N.E.2d 735 (N.Y. 2012) -- A mezzanine note holder had no cause of action for a breach of fiduciary duty against asset managers of an SPV holding mortgage backed securities and no cause of action for aiding and abetting a breach of fiduciary duty against the warehouse lender that sold the securities to the SPV or the rating agency that rated them. The note holder was a debt investor, not an equity investor, and thus was owed no fiduciary duty.
- Inter-Tel Technologies, Inc. v. Linn Station Properties, LLC, 360 S.W.3d 152 (Ky. 2012) -- Piercing corporate veil was appropriate because the grandparent and parent corporations deprived the wholly-owned subsidiary of all income and rendered it an asset-less shell by: (i) making all employees of the subsidiary employees of the grandparent; (ii) having all payments by the subsidiary's customers go into a "lock box" account controlled by the grandparent and then treating the funds as property of the grandparent; (iii) having the grandparent pay all the vendors and lessors who provided goods, services, or property to the subsidiary; (iv) listing the parent and grandparent as the named insureds on the property damage insurance for the subsidiary's leased premises; (v) failing for numerous years to hold an annual board of directors or shareholders meeting for either the parent or the subsidiary; and (vi) failing to file sales and use tax returns for the subsidiary but instead including all of the subsidiary's transactions in the returns of the grandparent and another affiliate.
- CBR Event Decorators, Inc. v. Gates, 962 N.E.2d 1276 (Ind. Ct. App. 2012) -- The shareholders of a corporation formed to purchase assets of an existing business were not liable for the corporation's breach of the purchase contract because piercing the corporate veil requires some causal connection between the principal's misuse of the corporate form and the fraud on third parties. The only fraud alleged was the corporation's claim that the seller made misrepresentations that the merger clause in the purchase agreement contradicted and this had no relationship to the corporation's status. The seller was aware that the corporation was newly formed and thus would lack corporate records.
- In re Perry H. Koplik & Sons, Inc., 2012 WL 1098546 (Bankr. S.D.N.Y. 2012) -- The officers of closely-held corporation violated their duty of care with respect to extensions of credit to a customer and their duty of loyalty in forgiving loans to themselves. Their liability for breach of the duty of care was limited by the failure to prove that the breach was the proximate cause of the losses given the customer's accounting fraud.
- Ret. Bd. of the Policeman's Annuity & Benefit Fund v. Bank of New York Mellon, 2012 WL 1108533 (S.D.N.Y. Apr. 3, 2012) -- MBS certificates are subject to the Trust Indenture Act, because they are debt not equity.
C. Borrower Liability
- In re BankAltantic Bancorp, Inc. Litigation, 39 A.3d 824 (Del. 2012), 2012 WL 1151740 (Del. Ch. Ct. 2012) -- A transaction in which bank holding company would: (i) sell all of its equity interest in its regulated savings bank; (ii) receive 100% of the equity in a newly formed entity owning the savings bank's principal assets and (iii) no longer function as a federally regulated bank holding company, constituted a sale of substantially all of its assets in violation of a trust indenture and was therefore permanently enjoined.
- Thomison v. State, 2012 WL 5989193 (Tex. Ct. App. 2012) -- Debtor who was unable to account for more than 500 head of cattle subject to a security interest was guilty of a first degree felony and sentenced to fifteen years in prison.
- Synectic Ventures I, LLC v. EVI Corp., 2012 WL 6628093 (Or. 2012) -- A debtor exercised an option to convert the secured party's loan to equity after the secured party's manager agreed to an extension of the debt. The manager -- who was also chairman of the board and treasurer of the debtor and who stood to benefit personally from the extension -- had a conflict of interest and the extension may not have been fair to the secured party, in which case the manager lacked authority to agree to the extension. Although the secured party's operating agreement expressly gave members permission to: (i) invest in other ventures with no obligation to account to the secured party for such opportunities; and (ii) own securities issued by and participate in the management of other companies in which the secured party invested, neither of these authorizations expressly waived a conflict of interest by the managing member.
D. Disputes Among Creditors and Intercreditor Issues
- In re Lexi Development Co., Inc., 2012 WL 1596717 (Bankr. S.D. Fla. 2012) -- A senior creditor and its assignee breached an intercreditor agreement by failing to provide notice of the debtor's default to the junior lender concurrently with notice to the debtor. Because the intercreditor agreement authorized the junior lender to cure a default to avoid the accrual of default rate interest and the concomitant erosion of its junior lien, the senior creditor's failure to provide notice precluded the senior creditor from charging interest at the default rate.
- Huntington National Bank v. RDJ Land & Property Group, LLC, 2012 WL 4357443 (S.D. Ind. 2012) -- An intercreditor agreement provided for lien subordination but contained no provision for debt subordination. The agreement had no applicability once the collateral was sold and the creditors were pursuing the guarantors for the deficiency.
- Prudential Ins. Co. of America v. WestLB AG, 2012 WL 4854713 (N.Y. Sup. Ct. 2012) -- A credit agreement and related documents required that payments received be distributed on a pro rata basis among all the lenders and required the consent of all lenders -- not just the Required Lenders -- to an amendment to the credit agreement or to the release of substantially all the collateral. The administrative agent for credit facility was not permitted to distribute the proceeds of the collateral in a manner that substantially benefitted those lenders that provided exit financing.
- Domus, Inc. v. Davis-Giovinazzo Constr. Co., Inc., No. 10-1654, 2011 U.S. Dist. LEXIS 93426 (E.D. Pa. Aug. 22, 2011) -- In an interpleader proceeding, the court considered the "doctrine of unclean hands" to determine whether a UCC first priority perfected secured creditor should be subordinated to other creditors. The court concluded that the doctrine would permit subordination where secured party engaged in "egregious misconduct", acted fraudulently, acted with bad faith, or acted unconscionably.
- Citizens Bank and Trust Co. v. Riederer (In re Brooke Capital Corp.), No. 08-22786-7, 2011 Bankr. LEXIS 210 (Bankr. D. Kan. Jan. 20, 2011) -- A lender subsidiary loaned cash to a parent and took back a security interest in the parent's interest in a sister subsidiary. The lender subsidiary's agent took possession of the pledged stock certificate. The lender subsidiary granted participation interests in this loan to third parties. No financing statements were filed to reflect the participation. The parent later granted another lender a second lien in the pledged stock, which the lender perfected by filing a financing statement (and perhaps by possession through the subsidiary lender's agent). The second lender sought summary judgment that its interests in the shares were senior to those of the lender subsidiary and its participants, in part arguing that the participations should be recharacterized as loans. After significant analysis of legal precedent on "true" participation interests and the relevant facts, the court concluded there was not enough evidence to grant summary judgment in the second lender's favor.
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