Banking & Finance Law Report

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Location is Not Everything When Perfecting a Security Interest

Most of us are familiar with that old saw “location, location, location”. While location might enhance the value of real estate, including the location as part of the collateral description in the UCC financing statement can limit the protections provided to a secured creditor and may provide a strategy for attack by a bankruptcy trustee.  First Niagara Bank learned this valuable lesson but only after spending substantial legal fees to protect a security interest where perfection should have been routine.

In the case of Ring v. First Niagara Bank, NA (In Re: Sterling United, Inc.),____F.3d ____, 2016 U.S. App. LEXIS 23009 (2d Cir. Dec. 22, 2016) (No. 15-4131-bk.), the Chapter 7 Bankruptcy Trustee for Sterling United, Inc., (“Debtor”) sued First Niagara Bank (“First Niagara”) asserting that First Niagara’s security interests in Debtor’s assets were avoidable under 11 U.S.C. § 547.  Under U.S.C. § 547(b)(4)(A), a trustee may avoid any “transfer of an interest of the debtor in property … made … on or within 90 days before the date of the filing of the petition” for bankruptcy, provided that those interests are not perfected security interests pursuant to 11 U.S.C. § 547(c)(3).…

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.”…

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 …

Does your construction mortgage really protect you from mechanic’s liens?

If you are a lender/mortgagee and your borrower/mortgagor is adding more real property collateral to the mortgage (in Ohio), how do you retain your first priority position in all mortgaged property while adding that property to the mortgage? This question is especially relevant when the borrower is assembling property as part of a development. The answer may not be as simple as you think.

You could do an amended and restated mortgage, but that could be construed as replacing the original mortgage, which would cause the priority of the mortgage to be changed from the recording date of the original mortgage to the recording date the amended and restated mortgage. So, instead you could record an amendment or modification which adds property to the mortgage. Naturally you would include a provision that states that all of the original mortgage provisions continue in full force and effect. That should do it, right? Well, recently one Ohio Court said “no.”

In 2003, Bridgeview Crossing LLC (“BC”) began assembling properties for a commercial development. In 2006 BC signed a $24,000,000 Cognovit Note and granted an open-end construction mortgage (the “Original Mortgage”) in favor of its lender (the “Mortgagee”). There was evidence that Panzica …

FDIC Guidance on Agricultural Credits

At a time of relative affluence in the farming industry, the FDIC has issued a warning on a need for monitoring agricultural credits. FIL-39-2014 (July 16, 2014) suggests that banking institutions of all sizes should carefully consider a recent, negative projection by the U.S. Department of Agriculture.

While current market conditions are good, the projection suggests there will be a slowdown in the growth of the farming and livestock sectors and that agriculture may be affected by adverse weather and declining land values, among other factors.

The guidance suggests that financial institutions should work carefully with agricultural borrowers when they experience financial difficulties. The guidance states that the FDIC’s supervisory expectations previously expressed in a 2010 financial institution letter continue (although the letter is rescinded in light of the current letter).

Cash flow analysis, secondary repayment sources and collateral support levels must be considered in order to properly analyze agricultural credits, according to the guidance.

The guidance notes that smaller farms and ranches rely on the personal wealth and resources of the owners, including off-farm wages. A universal review of the financial strength of the credit is required.

The guidance also notes workout strategies must be specifically tailored for agricultural …

FBI increases criminal fraud investigations by 65%, director reports

FBI Director James Comey shared the bureau’s enforcement trends and objectives at the New York City Bar Association’s Third Annual White Collar Crime Institute on May 19.

Comey recognized that although counter-terrorism is still a top priority for the agency, white-collar cases are receiving significant focus and resources. In the mortgage industry, agents are investigating foreclosure rescue companies preying on stressed homeowners and criminals who target senior citizens with the lure of reverse mortgages. In money laundering, enforcement targets are involved in a buying anonymous prepaid credit cards, using of “virtual currency” to transfer money and using smaller institutions to inject money into the banking system. In securities markets, the FBI also is targeting micro-cap market manipulation, insider trading and accounting fraud.

Comey emphasized in his remarks that the FBI has received additional resources from Congress, which allowed the agency to hire 2,000 people this year. In addition, he disclosed that more than 1,300 agents are working more than 10,000 white collar crime cases. These figures represent a 65% increase in the number of criminal fraud cases investigated by the FBI since 2008.…

U.S. Supreme Court Says Restitution Depends on Property a Lender Loses, not Collateral the Lender Receives

In the unanimous ruling Monday, the U.S. Supreme Court resolved a split in circuits regarding the interpretation of the Mandatory Victim’s Restitution Act (MVRA). In Robers v. United States, the high court confirmed that for purposes of calculating restitution, the return to the lender of collateral securing a fraudulent loan is not completed until the victim lender receives money from the sale of the collateral.

In 2010, Robers was convicted in federal court of conspiracy to commit wire fraud relating to two houses that Robers purchased by submitting fraudulent loan applications. When Robers failed to make loan payments, the banks foreclosed on the mortgages and, in 2006, took title to the two houses. The houses were sold in 2007 and 2008 in a falling real estate market. At sentencing, Robers was ordered to pay restitution of approximately $220,000, equal to the loan amount, minus the money that the banks had received from the sale of the two homes.

On appeal, Robers challenged the sentence imposed pursuant to the MVRA and argued that the MVRA required the court to determine the amount of loss based upon fair market value of the homes on the date that the lenders obtained title …

Ohio Supreme Court Resolves Certified Conflict Regarding Oral Forbearance Agreements

Last Spring, we discussed on this blog a trifecta of noteworthy lending cases pending before the Ohio Supreme Court. Today, the Court resolved one of them, and in doing so also resolved a certified conflict among Ohio’s appellate districts regarding whether Ohio’s Statute of Frauds bars a party from relying on an oral forbearance agreement to defeat a judgment that was entered pursuant to a written contract. The court’s unanimous opinion in FirstMerit Bank, N.A. v. Inks, Slip Opinion No. 2014-Ohio-789, is available here.

Daniel Inks, Deborah Inks, David Slyman, and Jacqueline Slyman guaranteed that Ashland Lakes, LLC would repay a $3.5 million loan from FirstMerit Bank. When the LLC defaulted, FirstMerit sued the guarantors, and the trial court awarded judgment to FirstMerit based on confessions of judgment entered by the defendants under warrants of attorney. The Slymans and Inkses then appealed to Ohio’s Ninth District Court of Appeals on the basis that the confessing lawyer did not produce the original warrants of attorney. After filing that (ultimately unsuccessful) appeal, the Slymans and Inkses also moved the trial court for relief from judgment, arguing that FirstMerit was not entitled to recover because it had entered into an oral forbearance …

Banking & Finance Law Report Top 10: News and Trends from 2013

2013 was an active year for the Banking & Finance Law Report. Our authors covered a wide range of topics — from legislative and regulatory changes to court opinions to financing and bankruptcy matters in the healthcare, agricultural and oil and gas industries. To offer a glimpse into the news and trends of the past year, following is a synopsis of the 10 best-read articles of 2013.

1. Major Changes to Affirmative Action Requirements Become Effective March 24, 2014
by Mike Underwood

In just two months, financial institute and other types of employers will need to comply with new affirmative action rules that:

  • Require employers to gather and retain data showing the results of their recruiting and hiring efforts and to set numeric targets for hiring veterans and disabled persons
  • Include significant additional obligations for reviewing, analyzing and documenting good-faith efforts and results
  • Specify that employers must offer applicants the opportunity to self-identify as a covered veteran or disabled person before a job offer occurs

Many employers may face a real challenge identifying and networking with recruiting sources that can refer qualified candidates for their businesses. They also will likely need to adjust data collection, retention, and analysis processes. Read

It’s Easy, People: Read Before You Sign

In a decision that will warm the hearts of vendors everywhere, the Court of Appeals for Ohio’s Eighth Appellate District recently upheld the enforceability of personal guaranty language in a credit application. See Wholesale Builders Supply, Inc. v. Green-Source Development, L.L.C., et al., 2013-Ohio-5129. This decision also serves as a reminder to read before signing.

The form of credit application used by Wholesale Builders Supply, Inc. (“Wholesale”) with prospective customers included the following language:

BY SIGNING THIS AGREEMENT YOU ARE BOTH PERSONALLY AND CORPORATELY LIABLE FOR THE TOTAL OF YOUR PURCHASES BY YOU OR ANYONE DESIGNATED TO SIGN FOR YOUR PURCHASES ON YOUR ACCOUNT.

Defendant Green Building Technology, L.L.C. (“Green”), through its principal John A. Pumper (“Pumper”), executed one of Wholesale’s credit applications, and Green thereafter ordered and received goods from Wholesale, along with invoices from Wholesale.…

Amendment to Agricultural Lien Law Reinforces Decision in Ohio Dept. of Agriculture v. Central Erie Supply & Elevator Association

A recent change to Ohio’s agricultural lien law clarifies the interplay between security interests governed by Article 9 of the UCC and those governed by Ohio’s agricultural lien statutes, and confirms the ruling of the Sixth Appellate Court of Erie County in Ohio Dept. of Agriculture v. Central Erie Supply & Elevator Association, 2013-Ohio-3061.

Central Erie Supply & Elevator Association (Central Erie) operated a grain elevator that it used to receive grain and other commodities from farmers (known as “claimants” under the statutory scheme) and sell the commodities to third parties. This made Central Erie an “agricultural commodity handler” under Ohio Revised Code Chapter 926. Pursuant to ORC § 926.021(C), the claimants who provided commodities to Central Erie retained a statutory lien on the commodities until they were paid.…

Agreeing to Renegotiate a Loan Does Not Waive Lender’s Right to Foreclose

In its Oct. 30, 2013 decision in General Electric Capital Corporation v. Tartan Fields Gold Club, Ltd., et al., 2013-Ohio-4875, the Fifth District Court of Appeals made clear that a lender does not waive its right to enforce its rights upon the borrower’s default merely entering into negotiations to restructure a loan; the court further held that the lender’s enforcement of its default rights during negotiations is not an act of bad faith. The court also relied on longstanding Ohio precedent that without more, a lender does not have a fiduciary relationship with a borrower.

In 2007, Tartan Fields Golf Club, Ltd. borrowed $13.3 million from GECC and secured the loan with a mortgage on its Delaware County golf course development. When Tartan Fields approached GECC in early 2009 about renegotiating the loan, GECC required that Tartan Fields sign a “Pre-Negotiation Agreement” that provided, among other things, that Tartan acknowledged that GECC had no fiduciary, confidential or special relationship with GECC; the Pre-Negotiation Agreement also gave both parties the unilateral right to terminate negotiations with three business days’ notice to the other party in their sole discretion and contained an integration clause.…

Lending Issues to Consider With Respect to The Perishable Agricultural Commodities Act of 1930

Secured lenders extending financial accommodations to borrowers whose collateral includes perishable food items should consider certain specific risks associated with such collateral. Notably, the Perishable Agricultural Commodities Act of 1930 (PACA) creates a statutory trust for the benefit of persons who originally sell the perishable agricultural commodities to such borrowers and are not paid. The PACA trust creates a tier of claims that “float above” the secured lenders’ priority interests in the perishable agricultural commodities. Thus, until all suppliers of perishable agricultural commodities to a borrower are paid in full, a secured lender’s security interests in the borrower’s collateral consisting of perishable agricultural commodities or the proceeds thereof are trumped by the sellers’ PACA claims. Types of borrowers whose collateral may be subject to these PACA statutory trusts include restaurants, grocery stores, or any other businesses that deal with perishable agricultural products.

The burden is on the borrower/PACA debtor (as opposed to the beneficiary of the PACA trust) to establish that the subject assets (including inventory and accounts receivable) are not PACA trust assets. See Sanzone-Palmisano C. V. M. Seaman Enterprises, 986 F.2d 1010 (6th Cir. 1993) (finding that the PACA debtor had the burden of proving the assets …

A Hypothetical in Agricultural Lending — Meet Farmer Bob, AgBank and Massive Grain Elevator

In this hypothetical, we will consider the following circumstances.

  • “Farmer Bob” grows wheat (i.e., crops)
  • “AgBank” has loaned Farmer Bob money secured in part by his wheat
  • “Massive Grain Elevator” wants to purchase Farmer Bob’s wheat

Can Massive buy the wheat and not get the shaft from AgBank? It depends. In 1985 Congress passed the Food Security Act; the provision 7 U.S.C. Section 1961, titled Protection for Purchasers of Farm Products (FSA), constitutes a wholesale preemption of the Uniform Commercial Code (UCC). UCC Revised Article 9-320(a) provides that:

“a buyer in ordinary course of business, other than a person buying farm products from a person engaged in farming operations, take free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.”

In addition, Official Comment 4 to 9-320(a) provides that:

“this section does not enable a buyer of farm products to take free of the security interest created by the seller … however, a buyer of farm products may take free of a security interest under Section 1324 of the Food Security Act of 1985, 7. U.S.C. Section 1631”

Meanwhile, FSA Section 1324 provides that notwithstanding …

Ohio Supreme Court overturns ruling in JNT Properties v. KeyBank

Commercial lenders will be glad to learn the Supreme Court of Ohio recently released a slip opinion overturning the Eighth District Court of Appeals’ decision in JNT Properties, LLC v. KeyBank, Nat’l Assoc. and concluding that KeyBank’s use of a "365/360" method of interest calculation in a commercial promissory note was not ambiguous.

As previously reported in our July 2011 and January 2012 blog posts, this case concerned KeyBank’s use of the 365/360 method of interest calculation. The promissory note at issue set the initial interest rate at 8.93% per annum, but also stated:

The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding.

The Court of Appeals held on June 30, 2011, that the language describing the 365/360 method could not "be read as clearly evidencing an intent of the parties to alter the ordinary meaning of the term ‘per annum,’ or as creating an ‘annual interest rate’ other than the stated rate of 8.93 percent." (The use of the 365/360 …

Health Care Lending: In re Altercare of Stow Rehabilitation Center

 

In mid-September, an Ohio appellate court rendered a decision in a long-pending dispute that raises an important issue for health care lenders: the impact of a contested certificate of need application. The impact of such a contest should be carefully considered by health care lenders.

On September 18, 2012, the Ohio Tenth District Court of Appeals rendered a decision in In re Altercare of Stow Rehabilitation Center (091812 OHCA10, 12AP-29). The parties to the appellate case were Schroer Properties of Stow, Inc. (“Schroer”) and Kent Care Center (“Kent”). At issue was Schroer’s decision to relocate 31 nursing home beds from 3 other Stark County, Ohio, nursing facilities and to a new facility, Altercare of Stow Rehabilitation Center (“Altercare Stow”), to be constructed in Stow, Summit County, Ohio.

Schroer submitted its Certificate of Need (“CON”) application in July, 2007, but the Ohio Department of Health (“ODH”) did not declare the application “complete” until February 28, 2011, nearly 4 years after Schroer’s initial submission.…

In re: Tracy Broadcasting Corporation

Secured creditors of borrowers holding Federal Communications Commission ("FCC") broadcasting licenses, as well as such borrowers seeking credit, will be reassured by a recent decision of the United States Court of Appeals for the Tenth Circuit, In re: Tracy Broadcasting Corporation, released October 16, 2012. The Tenth Circuit has joined other courts in upholding the priority of a creditor’s security interest over that of unsecured creditors in the post-bankruptcy sale proceeds of an FCC broadcasting license. The decision reversed the decisions of lower courts and held that "a security interest in the proceeds of a license attaches when the licensee enters into the security agreement, regardless of whether a sale [of the license] is contemplated at that time."

In 2008, Tracy Broadcasting (the "Debtor") issued a promissory note in favor of Valley Bank & Trust Company (the "Secured Creditor") and secured such obligations with various assets, including its general intangibles and the proceeds of such collateral. In 2009, the Debtor filed a Chapter 11 petition in the U.S. Bankruptcy Court for the District of Colorado. An unsecured creditor of the Debtor brought an adversary action to determine the extent of the Secured Creditor’s security interest in the proceeds of the sale of …

Post-Judgment Remedies

This article is Part Five in a seven-part series on how to structure sales and what to do when your customer fails to pay.  You can find previous articles in this series here: Structuring Sales to Ensure Payment; Signs of Trouble Before Payment Default; Default by a Customer; Knowledge is Power and What to Consider When Non-Payment Leads to Litigation.  Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series.

You have obtained money judgment against your debtor, thus turning you into a "judgment creditor" and them into a "judgment debtor", and now it’s time to convert that important piece of paper called a "certificate of judgment" into cash or something that can be reduced to cash.  First, determine what assets are available to pay your judgment, then determine how to access them.

 

Analyze the Debtor’s Assets

 

There are a number of sources of information about your judgment debtor’s assets and financial situation, including the following:

 

   Examine financial statements that the judgment debtor provided during the course of your business relationship to identify available assets.

 

What to Consider When Non-Payment Leads to Litigation

This article is Part Four in a seven-part series on how to structure sales and what to do when your customer fails to pay. You can find previous articles in this series here: Structuring Sales to Ensure Payment; Signs of Trouble Before Payment Default and Default by a Customer: Knowledge is Power.  Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series.

The previous article in this series, Default by a Customer: Knowledge is Power, outlined how to negotiate favorable terms with the customer to avoid default, proceed with litigation against the customer before there is a deluge, and prepare for a bankruptcy by the customer. This article will cover key considerations as you head toward litigation with a customer in default.

Determine Your Weaknesses

   Determine if you as vendor or service provider are subject to any counterclaims if you sue your customer for nonpayment. Might the customer assert that the goods sold or services provided were faulty, not in accordance with contract, or otherwise unacceptable? Your customer will have a difficult time proving its counterclaim if it has retained the goods you …

Default by a Customer: Knowledge is Power

This article is Part Three in a seven-part series on how to structure sales and what to do when your customer fails to pay. You can find previous article in this series here: Structuring Sales to Ensure Payment, Signs of Trouble Before Payment Default. Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series.

By understanding your position prior to or shortly after a default by the customer, it may be possible to negotiate favorable terms with the customer to avoid default, proceed with litigation against the customer before there is a deluge or prepare for a bankruptcy by the customer. To identify your options and rights as a vendor you must first determine the following:

1.      Default provisions;

2.      Default notice requirements;

3.      Permitted interest, late charges and attorney fees;

4.      The existence of guaranties (corporate or individual);

5.      Existing or potential collateral and available equity; and

6.      Where you would need to sue, i.e., jurisdiction. 

Signs of Trouble Before Payment Default

This article is Part Two in a seven-part series on how to structure sales and what to do when your customer fails to pay. You can find Part One of this series here: Structuring Sales to Ensure Payment. Please subscribe to this blog by entering your email in the box on the left, or check back weekly for additional articles in the series. 

With the recent economic slowdown in many sectors and the parade of corrupt corporate executives on the evening news, corporate managers are more sensitive than ever to signs of troubled business practices and how those practices affect outstanding receivables.  Many distressed businesses display early warning signs of impending trouble, including some or all of the following:

  • Lack of a sound business plan- The company may not have a plan or may have expanded past the vision of it original business plan.
  • Ineffective management style- The management of a small company that has experienced rapid growth may not be able to delegate authority effectively. 
  • Poor lender/vendor relationships- The company may not respond quickly or fully to its vendor’s request for financial information or may actively hide information from its vendors.
  • Change in market conditions- The market for the company’s product may

Health Care Financing: Security Interests in Deposit Accounts containing Medicare/Medicaid Receivables

Lenders making secured loans to health care providers with Medicare and Medicaid receivables should be aware of limitations on their ability to perfect security interests in such borrowers’ deposit accounts. Secured lenders may perfect security interests in their borrowers’ accounts receivable (and identifiable cash proceeds therefrom) by filing UCC financing statements, but when proceeds of those accounts receivable are received by borrowers and deposited into borrowers’ deposit accounts, security interests in the deposit accounts themselves can be perfected only by obtaining "control" over the deposit accounts pursuant to § 9-104(2) of the UCC.  In order to perfect such security interests in deposit accounts, revolving credit facilities are, therefore, typically subject to deposit account control agreements.  In a deposit account control agreement, the borrower, the secured lender and the depository bank agree that the depository bank will comply with instructions from the secured lender directing disposition of the funds in the deposit account, without further consent by the borrower. This arrangement enables the secured lender to obtain control over the deposit account, thereby perfecting its security interest in the deposit account pursuant to UCC §9-312(b).…

FINANCING A HEALTH CARE ENTITY PURCHASE USING DUE DILIGENCE TO SPOT RISK

When financial institutions fail to conduct the right kind of due diligence prior to financing the purchase of a health care entity, bad things can happen. Too often, banks focus their due diligence too narrowly, missing red flags that may result in over-estimation of value.

Here are some key points to think about when planning and doing due diligence.

Know the Business

Health care entities are special creatures in the market. They are highly regulated delivery systems, dependent on government, private and/or third party payers. They expose lenders to layers of risk that can go undetected when due diligence is conducted superficially. Due diligence of a health care entity should dig into a company to find out how it works, where its strengths lie, and what weaknesses it has. Inquire about and understand the nature of the health care services delivered. Ask that the services be specifically described. Identify the local labor pool available and quantify labor resources and costs – key elements for a health care provider.  Understand the payer mix to determine how the business is reimbursed, what the reimbursement and payment sources are, and how reliant the business is upon each source.  Understand the market economy and the up or downward trends that are …

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