Untitled Document

2015 Commercial Law Developments, Prepared by the Business Law Section Commercial Transactions Committee for the 2015 Business Law Section Annual Report
V. Secured Party and Borrower Liability

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

  • Arias v. Elite Mortgage Group, 439 N.J. Super. 273 (N.J. App. Div. 2015) – Secured party does not breach duty of good faith by terminating loan forbearance agreement when borrower defaults.

  • BancorpSouth Bank v. 51 Concrete LLC, 2015 Tenn. App. LEXIS 30 (Tenn. Ct. App. 2014) – A borrower granted a security interest to the secured party on three pieces of equipment that the borrower subsequently sold to a buyer. The buyer did not perform a UCC search but instead relied on the borrower’s representation that no liens existed. The buyer later sold the equipment to third parties. The secured party prevailed on a conversion claim. The court held that the buyer’s failure to perform a UCC search in accordance with industry practice did not constitute sufficiently egregious conduct to merit punitive damages.

  • In re TPOP, LLC, 2015 Bankr. LEXIS 306 (Bankr. D. Del. 2015) – Creditor does not have to forgive debt when debtor breaches forgiveness agreement.

  • In re Lehman Brothers Holdings, Inc., 541 B.R. 551 (S.D.N.Y. 2015) – A secured party that made loans due on demand and whose agreements with the debtor gave the secured party the right to demand additional collateral at any time cannot be liable for demanding additional collateral, even if the amount rendered the secured party overcollateralized, because the obligation of good faith and fair dealing does not impose duties inconsistent with the express terms of the parties’ contractual relationship.

  • In re Cable’s Enterprises, LLC, 2015 WL 9412805 (M.D.N.C. 2015) – A secured party that used and negligently damaged the debtor’s excavator, was liable for the damages caused thereby.

  • Brackfield & Associates Partnership v. Branch Banking and Trust Co., 2015 WL 5177737 (E.D. Tenn. 2015) – A secured party could not be liable under the Right to Financial Privacy Act for filing a financing statement containing a complete list of the debtor’s assets and liabilities because the information was not provided to a government authority.

  • Brooklands, Inc. v. Sweeney, 2015 WL 1930239 (S.D. Fla. 2015) – A prospective debtor that paid a $10,000 breakup fee and signed a release of liability when it cut off negotiations with a prospective secured party, but then sued when the prospective secured party failed to terminate its financing statements, could bring no claim under RICO or for fraudulent inducement or unjust enrichment because such claims related to conduct that predated the release and were therefore covered by it. However, the prospective debtor could bring claims for tortious interference with an advantageous business relationship and for slander of title based on the failure to terminate the financing statement.

  • Gregoria v. Total Asset Recovery, Inc., 2015 WL 115501 (E.D. Pa. 2015) – A repossession agent could be liable under RICO – but not under the Fair Debt Collection Practices Act – for repossessing a car after default because the 150% interest rate on the secured obligation was usurious under Pennsylvania law. Even though the security agreement provided that it was governed by Delaware law – which has no prohibition on usury – Pennsylvania law governed because the car was brought into the state, the litigation occurred there, and Pennsylvania’s restrictions on usury are fundamental policy of the state.

  • Sirazi v. General Mediterranean Holding, SA, 2015 WL 6770537 (N.D. Ill. 2015) – A buyer that conspired to acquire the debtor’s equity interest in an entity in violation of a settlement agreement of which the buyer was aware and under which the debtor had granted a security interest in those rights and promised not to sell them without notification to the secured party was liable for intentional interference with contract and civil conspiracy. The jury’s finding of a civil conspiracy supported its imposition of modest punitive damages.

  • Consolidated Electrical Contractors & Engineers, Inc. v. Center Stage/Country Crossing Project, LLC, 175 So. 3d 642 (Ala. Ct. App. 2015) – The subcontractor that obtained a preliminary injunction prohibiting the owner from selling generators that the subcontractor had installed, based on an incorrect claim that it retained a security interest in the generators, could be liable for damages up to the amount of the $15,000 bond it posted. However, because the subcontractor acted in good faith, it was not liable for additional damages.

  • In re TPOP LLC, _ B.R. _ (Bankr. D. Del. 2015) – An obligor’s breach of an extension agreement meant that the creditor did not have to forgive the debt.

  • Arias v. Elite Mortgage Group, N.J. Super. _ (App. Div. 2015) - Secured party does not breach duty of good faith when terminating loan forbearance agreement when borrower defaults.

  • City of Westland Police and Fire Ret. System v. Metlife, Inc., _ F.Supp. 3d _, 2015 WL 5311196 (S.D.N.Y. Sept. 11, 2015) - Court extended the analysis in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S.Ct. 1318 (Mar. 24, 2015) from liability under Section 11 of the Securities Act of 1933 to liability under Rule 10b-5. In both cases, in determining liability for a statement of opinion in a disclosure document, the courts emphasized the particular facts and circumstances and the relevant context for ascertaining the reasonable expectations of the reader regarding the work expected to be done as the basis for the opinion.

  • ACE Securities Cotp. v. DB Structured Products, _ NY _ _ (2015) – for statute of limitations purposes, representations and warranties breached and statute of limitations begins running at closing. Breach of related repurchase obligation does not start.

  • Montgomery v. GCFS, Inc., _ Cal.App.4th _ (2015) – A licensed finance lender under California law may make assignments to non-licensed persons, as well as to institutional investors or licensed finance lenders (as expressly provided in the finance lender statute).

  • Federal Trade Commission v. Commerce Planet, Inc., _ F.3d _ (9th Cir. 2019) – A corporation violated § 5 of the FTC Act and “unjustly” received $18.3 million and thus owed restitution of that amount under the Act (citation to the Restatement as to the general nature of restitution). The president was determined to be jointly and severally liable with the corporation under the Act. He had “unjustly” received a mere $3 million and wanted his liability limited to that amount under the “normal” rules of restitution. Because of his joint and several liability with the corporation he was liable for the full amount of restitution owed by the corporation, even though it exceeded the amount that he had personally received.

B. Obligations Under Corporate and Securities Laws

  • 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.

  • Veleron Holding, B.V. v. Morgan Stanley, 2015 WL 4503580 (S.D.N.Y. 2015) – The investment bank that entered into an Agency Disposal Agreement with a secured party that authorized the investment bank to sell the publicly traded stock collateral in the event of default could be liable for insider trading – but not for market manipulation – for selling the stock short after learning of a default and the likelihood that the secured party would instruct it to sell the collateral, thereby causing the stock price to fall. Genuine issues of fact remained as to whether the information was non-public and confidential.

  • Medical Weight Control Specialists v. Commissioner, _ TC _ (2015) – Revival of corporation that had not paid state franchise taxes does not suspend statute of limitations that ran during suspension period.
  • Northstar Financial Advisors v. Schwab Investments, _ F3d _ (9th Cir 2015) – Investment management firm had standing to sue managers of a mutual fund for breach of duties owed to fund shareholders who were the firm’s clients. Plaintiff – who alleged that the managers failed to adhere to the fund’s fundamental investment objectives of seeking to track a particular index and not over-concentrating its investments in any one industry – stated a claim for breach of contract. Shareholders’ adoption of the investment objectives added a structural restriction on the power conferred on the trustees that could only be changed by a vote of the shareholders, and was subsequently reflected in the fund’s registration statements and prospectuses, thus creating a contract between the trustees and the investors. Plaintiff stated a claim that the defendants breached their fiduciary duties by failing to ensure the fund was managed in accordance with the fundamental investment objectives and by changing the fundamental investment objectives without obtaining required shareholder authorization. Trustees owed a fiduciary duty to the shareholders, rather than the fund, and so plaintiff was not required to proceed by way of a derivative action.

  • Quadrant Structured Products Company v. Bevin, _Del.Ch. _ (2015) – A creditor may bring creditor derivative claim if the entity was insolvent at time the claim was brought, even if the company later became solvent.

  • Speirs v. BlueFire Ethanol Fuels, Inc., _ Cal.App.4th _ (2016) (unpublished) – A corporation’s officers do not have a fiduciary duty to warrant holders because the warrants holders have only a contractual claim and are not yet shareholders. Lender’s commitment to make loan in partial exchange for warrants had value. Holders of warrants could not seek both damages and specific performance.

  • Aviation West Charters LLC v. Freer, C.A. No. N14C-09-271 Wcc Ccld (Del. Super. Ct. July 2, 2015) – Corporate officer could be personally liable for corporate act where there is sufficient personal participation in corporate fraud. Standard integration clause in agreement did not operate as a non-reliance provision for pre-contractual misrepresentations because it did not “explicitly” disclaim reliance.

C. Borrower Liability

  • BBC Restaurant LLC v. BDC Ltd. LLC, 2015 WL 2329064 (Mich. Ct. App. 2015) – Although the sole member of the debtor, which operated a restaurant, instructed the restaurant manager to remove equipment, the member was not liable in conversion to the secured party with a security interest in equipment because the member did not exercise dominion over the equipment and there was insufficient evidence that the member instructed the manager to remove the collateral.

  • CNH Capital America LLC v. Hunt Tractor, Inc., 2015 WL 5554020 (W.D. Ky. 2015) – A minority shareholder that allegedly controlled the debtor’s decision to use proceeds of inventory to pay down a bank loan that the shareholder had guaranteed was not entitled to summary judgment on the inventory lender’s conversion claim because even though the proceeds had been deposited into the bank, which had a security interest in deposits, the bank would not have had priority in the deposited funds or the right to engage in setoff unless the loan to the bank was in default, and that issue was the subject of a factual dispute.

  • M & M Financial Services, Inc. v. Hayes, 174 So. 3d 1172 (La. Ct. App. 2015) – The secured party with a security interest in an uninsured vehicle had no claim against the motorist who damaged the vehicle or the motorist’s insurer because the secured party’s claim is derivative of the debtor’s and, under the state’s ‘No Pay, No Play’ law, the owner of an uninsured vehicle has no claim for the first $25,000 in property damage.

  • Euro Motorcars Germantown, Inc. v. Manheim Remarketing, Inc., 2015 WL 1057887 (E.D. Pa. 2015) – A used car dealership stated a cause of action for unjust enrichment against the auction house whose employees systematically understated losses and overstated gains in reporting vehicle auction sales to the dealership’s secured creditor in connection with floor-plan audits, causing the dealership to pay commissions that were never actually earned.

D. Disputes Among Creditors and Intercreditor Issues

VI. U.C.C. – Sales and Personal Property Leasing | Table of Contents