Banking & Finance Law Report

Seriously Misleading UCC Searches

Determining whether a security interest is properly perfected by using a state’s online lien search may be leading you astray.

Perfecting a security interest in collateral establishes the priority of the secured party’s claim to such collateral, providing the perfected secured party with an interest in such collateral superior to the rights held by most subsequently perfected security creditors or judicial lien creditors.  For most types of collateral owned by an entity, a security interest may be perfected by filing a financing statement describing the security interest with the secretary of state’s office in the state where such entity is formed.  A financing statement is a form of public notice intended to inform others dealing with such borrower (referred to as a “debtor”) that the debtor has granted a security interest in its assets.

The Uniform Commercial Code (“UCC”) dictates that a financing statement covering property owned by an entity debtor (as opposed to an individual) must identify the debtor by its exact legal name.  Nonetheless, to alleviate the otherwise disastrous consequences of harmless errors or omissions in a financing statement, the law provides that financing statements are effective (even with errors) so long as they are not “seriously misleading.” Continue Reading

STRUCTURED DISMISSAL OF CHAPTER 11 CASES AND THE INVOLUNTARILY SUBORDINATED CREDITOR: Official Comm. of Unsecured Creditors v. CIT Group/Bus. Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015)

The United States Court of Appeals for the Third Circuit plays a uniquely important role in the development of the bankruptcy laws.  The liberal venue rule for bankruptcy cases set out in 28 U.S.C. § 1408 has led to the disproportionate filing of large and mega chapter 11 bankruptcy cases being filed in the District of Delaware.  The decisions of the Third Circuit are binding on the District Court and Bankruptcy Court for the District of Delaware.  Consequently, the decisions of the Third Circuit govern that disproportionate number of large and mega chapter 11 cases.  Furthermore, because the bankruptcy court decisions in these mega cases often involve greater dollar amounts, they are more likely to be appealed, which can result in the Third Circuit being one of the few circuit courts to address a given issue.

In Official Committee of Unsecured Creditors v. CIT Group/Business Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015), the Third Circuit recently considered the propriety of a “structured dismissal” of a chapter 11 case that provided for a distribution of estate assets contrary to the distributional scheme set out in the Bankruptcy Code.  In Jevic, the debtor was woefully insolvent.  Its secured creditors were owed millions more than the value of the debtor’s assets.  The Official Committee of Unsecured Creditors, however, challenged the secured creditors’ claims on fraudulent conveyance and preference theories.  That litigation lasted for several years, and the Committee’s claim eventually survived a motion to dismiss the case.  At that point, the secured creditors, the debtor and the Unsecured Creditors’ Committee agreed to settle the litigation.  Under the terms of the settlement, nearly $4 million was made available to the Committee and a litigation trust, with those funds available for use in the pursuit of unrelated litigation in the bankruptcy case.  Any amount remaining after such litigation would be distributed to general unsecured creditors.  The claims against the secured creditors were dismissed with prejudice, and the chapter 11 case was to be dismissed.  Conspicuously absent from the parties who reached the settlement was a group of truck drivers who held an uncontested WARN Act claim against the debtor for its failure to provide the required statutory notice prior to closing the business.  A significant portion of that WARN Act claim was entitled to priority over the claims of general unsecured creditors under Bankruptcy Code § 507 (a)(4).  Nevertheless, the claim would not be paid under the settlement even though general unsecured creditors would receive at least a partial payment on their claims. Continue Reading

Sixth Circuit Re-Affirms There Is No Constitutional Right to Financial Privacy

In a decision issued May 21, 2015, the Sixth Circuit stayed its course in refusing to extend constitutional protection to encompass a right of privacy in financial records and, in doing so, retained its position as the most conservative of the federal circuits to have addressed this issue.

The case, Moore v. WesBanco Bank, Inc., Case No. 13-4477, 2015 U.S. App. LEXIS 8589, arose from allegations that a bank and an assistant county prosecutor violated plaintiff Moore’s Fourteenth Amendment right to substantive due process when the bank provided copies of two canceled checks drawn on his account to the prosecutor without insisting upon a subpoena or seeking his consent.  Both defendants denied that the bank provided Moore’s checks to the prosecutor.  The district court found no need to resolve the factual dispute because it concluded Moore had no constitutional claim based on prior Sixth Circuit precedent.  On appeal, the Sixth Circuit agreed and declined to revisit the issue of whether it should extend the right to informational privacy to financial records. Continue Reading

The Eleventh Circuit Holds That the National Bank Act Preempts State-Law Whistleblower Claims by Terminated National Bank Officers

The United States Court of Appeals for the Eleventh Circuit just recently held that an officer of a nationally-chartered bank regulated by the National Bank Act (NBA) had no claim for wrongful termination under a Florida whistleblower statute.  According to the federal court, the state-law whistleblower claims were preempted by 12 U.S.C. § 24 (Fifth) of the NBA, which gives a national bank the power to dismiss bank officers “at the pleasure” of the board of directors.  Consistent with decisions by other federal circuits, the Eleventh Circuit interpreted “at the pleasure” to be equivalent to at-will employment and held that the Florida whistleblower statute at issue was preempted because, contrary to the nature of at-will employment, it prohibited dismissal of an employee for complaining about certain improper activities by an employer.  Further, there was no comparable employment protection in federal law (e.g., Title VII) that would indicate congressional intent not to preempt the Florida statute through 12 U.S.C. § 24 (Fifth) of the NBA.  This is a useful employment law decision for national banks that helps preserve their freedom to employ, or not employ, their officers as they see fit and avoid certain types of miscellaneous wrongful termination lawsuits under state law.  Below are the details. Continue Reading

Ohio Supreme Court Confirms That A Foreclosure Plaintiff May Submit Proof Of Standing Subsequent To Filing The Complaint

In what most pundits agreed would be a swift reversal, the Ohio Supreme Court did in fact unanimously reverse the Ninth District Court of Appeals in Wells Fargo Bank, N.A. v. Horn, Slip Opinion No. 2015-Ohio-1484, a 20-paragraph decision that helps to explain a sometimes-misunderstood line from Schwartzwald.

In Horn, Wells Fargo filed the foreclosure complaint on its behalf as “successor by merger to Wells Fargo Home Mortgage, Inc. fka Norwest Mortgage, Inc.”  Both the note and the mortgage identified Norwest Mortgage as the lender and the Horns as the borrowers.  The Horns, first acting pro se and later with the assistance of counsel, defended against the complaint and Wells Fargo’s ensuing motion for summary judgment by asserting that Wells Fargo was not the real party in interest and lacked standing.  Wells Fargo then submitted the affidavit of a “Default Litigation Specialist” employed there, who averred that in 2000, Norwest Mortgage, Inc. had changed its name to Wells Fargo Home Mortgage, Inc., that Wells Fargo Home Mortgage, Inc. had later merged into Wells Fargo, and that Wells Fargo was the holder of the note and mortgage at the time it filed the complaint.  The trial court granted Wells Fargo’s motion for summary judgment and issued a decree of foreclosure in Wells Fargo’s favor.  The Horns appealed, but did not challenge the trial court’s conclusion on standing grounds.  Nevertheless, the Ninth District sua sponte considered the issue of standing.  Seizing on the language in Schwartzwald that standing is “determined as of the filing of the complaint,” 134 Ohio St.3d 13, 2012-Ohio-5017, 979 N.E.2d 1214, ¶ 3, the court of appeals held that a plaintiff in a foreclosure action must attach to its complaint documents that prove that it has standing at the time the complaint is filed.  Because Wells Fargo had failed to attach such proof to its complaint, the Ninth District held that Wells Fargo lacked standing and remanded the case to the trial court to dismiss the complaint without prejudice. Continue Reading

Volcker Alliance Report Ignores Community Banks (For The Most Part)

There is much to like in the recently released report of the Volcker Alliance.  Unfortunately, however, there is little discussion of those banking institutions commonly referred to as community banks.

At roughly the same time last month, the Independent Community Bankers Association of America highlighted in a press release the importance of community banks in helping small businesses gain financial stability.  The release said there are roughly:

6,000 community banks, including commercial banks, thrifts, stock and mutual savings institutions. Assets may range from less than $10 million to $10 billion or more. Across the nation, community banks operate 52,000 locations, employ 700,000 Americans and hold $3.6 trillion in assets, $2.9 trillion in deposits and $2.4 trillion in loans to consumers, small businesses and the agricultural community.

The relative unimportance of the community banking industry, notwithstanding employment of roughly 700,000 people, to those who prepared the Volcker Alliance report on regulatory reform suggests just how concentrated in large banking organizations the financial services industry has become following the Great Recession.  The draftsmen just had bigger fish to fry. Continue Reading

The dawn of .sucks — protecting your brand

Our colleagues at Porter Wright’s Technology Law Source blog have watched the launch of hundreds of new generic top-level domains (gTLDs) through the past several months. Introduced to increase competition in the domain name market, and enhance the Internet’s stability and security, these new gTLDs are projected to change the face of the Internet and how we use it. Today, our attorneys share an article that should be of interest to anyone with a recognizable brand: The .sucks gTLD entered its sunrise period. What does that mean? If unclaimed, brand owners could wake up to a full-fledged — and completely legal — gripe site come September. Read more

FDIC Guidance on Brokered Deposits

Late last year, the FDIC released guidance on brokered deposits in the form of a series of frequently asked questions and answers (FAQs).  The guidance is available here: https://www.fdic.gov/news/news/financial/2015/fil15002a.pdf

The ostensible purpose of the guidance is to collect previously scattered views on various questions related to two primary subjects: what are brokered deposits and how they should be reflected on bank call reports. Brokered deposits impact assessments for deposit insurance.  For some institutions, the FAQs may have little impact but for others the FAQs will be important and required reading.

Although the FDIC called the release “guidance,” some commentators have suggested the material contains the first expression by the agency on a number of issues, including in particular further discussion on an important exception to the definition of deposit broker, the so-called “primary purpose exception” discussed below. Continue Reading

The Modernization of Ohio’s Receivership Statute

I.  Introduction

Effective March 23, 2015, Ohio’s antiquated receivership statute (Ohio Rev. Code Chapter 2735) will be modernized, particularly as it relates to the appointment of a receiver in commercial mortgage foreclosures and the ability of a receiver to sell real estate free and clear of liens.

 II.  Appointment of a Receiver

Previously, commercial mortgagees were a bit hamstrung because only two of Ohio Rev. Code Section 2735.01’s provisions for appointment of a receiver typically potentially applied, Section 2735.01(B) (“In an action by a mortgagee, for the foreclosure of his mortgage and sale of the mortgaged property, when it appears that the mortgaged property is in danger of being lost, removed, materially injured, or that the condition of the mortgage has not been performed, and the property is probably insufficient to discharge the mortgage debt”) and Section 2735.01(F) (“In all other cases in which receivers have been appointed by the usages of equity”).  In situations where it was unclear whether the property was worth less than the unpaid mortgage balance, some courts struggled with the decision of whether to appoint a receiver, even in cases where the borrower agreed in the mortgage to appointment of a receiver upon the occurrence of an event of default and without regard to the value of the property.  Although in recent years many courts used such contractual language to hold that the borrower waived the operation of Section 2735.01(B)’s valuation requirement, and many courts appointed receivers pursuant to Section 2735.01(F) in instances where the mortgage called for the appointment of a receiver upon an event of default but did not contain any language waiving the valuation requirement, the revised statute removes any doubt about the situations in which a receiver can be appointed. Continue Reading

Tax Considerations in Settlement Agreements Regarding Cancellation of Debt

Although not every settlement agreement has to be reviewed by a tax lawyer if you are representing a creditor or a debtor and the subject matter of the settlement involves the compromise of a debt or a cancellation of an indebtedness, there are some basic tax matters which must be considered.

If you are representing the creditor, you should consider whether the cancellation or compromise of the debt will be deemed income for tax purposes.  This consideration will lead to a determination of whether the creditor must issue a Form 1099-C to the IRS and to the debtor.

If you are representing the debtor, you must consider whether the settlement qualifies as a contested liability dispute.  If the debtor-taxpayer, in good faith, disputes the liability of the obligation, then a subsequent settlement of the disputed debt may not result in income, and thus, the creditor would not have to issue a Form 1099-C.

The recent Sixth Circuit case of McClusky v. Century Bank, FSB, 2015 U.S. App. LEXIS 1419 (2015) concerns the consequences of failing to consider possible tax issues, and provides an excellent summary of the law applicable to the settlement of a dispute involving the cancellation or discharge of an indebtedness.  Although the creditor ultimately won a reversal of the District Court’s summary judgment, each side incurred substantial post-settlement attorneys’ fees which could have been avoided by including a tax-treatment clause in the settlement agreement. Continue Reading

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