2014 Commercial Law Developments, Prepared by the Commercial Transactions Committee for the Business Law Section 2014 Annual Report
V. Lender and Borrower Liability

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

  • Callaway Bank v. Bank of West, 2014 WL 293823 (W.D. Mo. 2014) - A refinancing bank's action against a prior lender for fraud and other torts in connection with loan as to which the debtor fraudulently claimed to own the cattle purporting to secure the debt depended in part on the prior Lender's knowledge about the facts.
  • Hibbs v. Berger, 430 S.W.3d 296 (Mo. Ct. App. 2014) - An insider secured party that foreclosed on the assets of closely-held business did not have liability to another insider that was an unpaid unsecured creditor. There was no basis for piercing the corporate veil against the secured party.
  • Blixseth v. Credit Suisse AG, 2014 WL 4799066 (D. Colo. 2014) - An individual debtor stated a claim against secured party that, in connection with a corporate bankruptcy case, joined a plan of reorganization pursuant to which the secured party would forego recourse to its collateral and instead proceed as an unsecured claimant, while here, formerly secured creditor knew that repayment was likely to come from the individual debtor whom the secured party had released from personal liability.
  • First Hill Partners, LLC v. Bluecrest Capital Management Ltd., 2014 WL 4928987 (S.D.N.Y. 2014) - A debtor hired an advisor to find a buyer of its assets and negotiate a sale in return for a monthly retainer, a success fee, and reimbursement of expenses. After the advisor located a buyer and negotiated a transaction, the secured party foreclosed and sold the assets to the identified buyer on substantially the same terms. The buyer sufficiently asserted a claim against the debtor's secured party for unjust enrichment and tortious interference.
  • Anthony Marano Co. v. J & S Produce Corp., 2014 WL 4922324 (N.D. Ill. 2014) - Banks that received payment on their secured loans from the debtor's PACA trust funds may not be entitled to a bona fide purchaser defense if the banks had notice that the debtor was in breach of its duties with respect to the PACA trust. The debtor was profitable through 2010 and occasionally maintained cash reserves far in excess of its accounts payable. However, it also had cash-flow problems and overdrew its deposit accounts. In addition, although the debtor historically paid all but a few of its PACA creditors, it often paid them late. Although the bank that received $565,000 in payment on a line of credit re-advanced $582,000, that created no defense to disgorgement for violation of the PACA trust.
  • MSMTBR, Inc. v. Mid-Atlantic Finance Co., 2014 WL 953499 (Tex. Ct. App. 2014) - 2014 WL 3697736 (Tex Ct. App. 2014) (revised opinion) - A debtor sold chattel paper to a financier and gave the financier the certificates of title to the underlying collateral. The debtor then applied for substitute certificates of title by falsely certifying that the certificates had been lost or destroyed and sold many of the vehicles. The debtor could be liable in tort for its actions even though it might also be liable for breach of contract.
  • Stancil v. First Mount Vernon Industrial Loan Association, 2014 D.C. App. LEXIS 59 (D.C. Ct. App. 2014) - Court enforced an oral forbearance agreement.

    Comment: Some states render oral forebearance agreements per se unenforceable. See, e.g. California Civil Code § ___.
  • In re Prince Frederick Investment, LLC, 2014 Bankr. LEXIS 3839 (Bkrtcy. D. Md. 2014) - Other creditors could not obtain equitable subordination against a lender that exercised contractual rights. The lender did not owe a fiduciary duty to the other creditors nor did it engage in egregious conduct.
  • Arias v. Elite Mortgage Group, _ N.J. Super. _ (App. Div. 2015) - Lender does not breach duty of good faith when terminating loan forbearance agreement when borrower defaults.
  • In re TPT, LLC, _ B.R. _ (Bankr. D. Del. 2015) - Creditor does not have to forgive debt when debtor breaches forgiveness agreement.

B. Obligations Under Corporate and Securities Laws

  • Petroleum Enhancer, LLC v. Woodward, 558 F. App'x 569 (6th Cir. 2014) - A director of a company breached his fiduciary duty to the company by forming a new entity to acquire a secured obligation of the company and then foreclosing on the collateral. The director's actions were not the proximate cause of the company's failure. While there was some evidence that, because the secured party did not know how to deal with the collateral, the director's action may have hastened both foreclosure and the company's bankruptcy, there was no evidence that the company could have avoided these fates or had any source of alternative financing.
  • Yates v. United States, 135 S.Ct. 1074 (2015) - Knowingly disposing of undersized fish in order to prevent government from taking lawful custody and control of them did not violate Sarbanes- Oxley Act (SOX) by destroying or concealing a "tangible object" with the intent to impede, obstruct, or influence government's investigation into harvesting undersized grouper because "tangible object," within meaning of SOX, covers objects that one can use to record or preserve information, and disposal of undersized fish did not involve a tangible object for purposes of SOX.

C. Borrower Liability

  • State v. Johnson, 140 So. 3d 854 (La. Ct. App. 2014) - Debtor who sold collateral after default was not guilty of violating La. Stat. § 14.201, which criminalizes the sale of collateral "pledged" to a bank. While the debtor had granted a bank a security interest in the collateral, he had not "pledged" it because he never gave the bank possession.
  • State v. Collyns, 99 A.3d 300 (N.H. 2014) - A debtor attempted to sell restaurant equipment that the debtor had purchased on credit. The debtor was not guilty of attempted theft by unauthorized taking. Even though the sales agreement expressly stated that the seller remained the owner of the equipment until the debtor paid in full, the UCC limited that language to the retention of a security interest. The theft statute does not criminalize the sale of property subject to a security interest.
  • Wells Fargo Equipment Finance, Inc. v. Titan Leasing, Inc., 768 F.3d 741 (7th Cir. 2014) - An equipment lessor used its rights under the lease to secure a nonrecourse loan. The lessor warranted to the secured party that the equipment had been delivered and accepted by the lessee and that the lessee has acknowledged receipt and acceptance. The lessor breached those warranties because even if, under the terms of the lease, the lessee had accepted the equipment when it was shipped, the lessee never acknowledged receipt or acceptance and in fact never received the equipment or paid any rent under the lease.

D. Disputes Among Creditors and Intercreditor Issues

  • Millennium Bank v. UPS Capital Business Credit, 327 P.3d 335 (Colo. Ct. App. 2014) - A secured party pursuant to intercreditor agreement had priority in a subcontractor's general intangibles but not accounts. The secured party had priority in the subcontractor's breach of warranty claim against a paint seller even though the damages were measured by the cost of the extra services provided by the subcontractor to the contractor in several repainting efforts, for which the contractor did not pay the subcontractor. The subcontractor did not render any services to the paint seller and the contractor was not liable for the cost of the extra services. Thus hence the claim was not an "account."
  • Co-Alliance, LLP v. Monticello Farm Service, Inc., 7 N.E.3d 355 (Ind. Ct. App. 2014) - A secured party in first priority position agreed to subordinate its interest to a secured party in third priority position. This did not result in "complete subordination" to the benefit of the intermediate secured party, and instead resulted in "partial subordination." This effectively left the intermediate secured party unaffected. The junior secured party steps into the shoes of the senior secured party only to the extent of the lesser of: (i) the amount owed to the senior secured party; or (ii) the amount owed to the junior secured party.

VI. U.C.C. -- Sales and Personal Property Leasing / Table of Contents