Glass & Goldberg | Financing, Property & Bankruptcy Law

The absolute priority rule has proved particularly vexing to judges and attorneys alike in the Ninth Circuit for several years. This was a result of the Ninth Circuit’s interpretation of the bankruptcy code that allowed individual chapter 11 debtors to retain a significant portion of their assets without the consent of their creditors. Finally, in one of the most important local bankruptcy cases of 2016, the Ninth Circuit finally closed this loophole in Zachary v. California Bank & Trust (In re Zachary), 811 F.3d 1191 (9th Cir. 2016).

A chapter 11 plan of reorganization must be fair and equitable to a class of creditors. The absolute priority rule mandates that a chapter 11 repayment plan must provide for a dissenting class of unsecured creditors to be paid in full before an individual debtor may retain any non-exempt property. An objecting creditor’s plan treatment will only be considered fair and equitable if it complies with the absolute priority rule.

In Friedman v. P+P, LLC (In re Friedman), 466 B.R. 471 (9^th Cir BAP 2012) the Ninth Circuit held that the absolute priority rule did not apply to individual chapter 11 cases. As a result of this distinction, a concern arose among legal professionals and the commercial credit industry about the effect of the resulting legal interpretation (loophole) which allowed individual chapter 11 debtors with a high net-worth, often from owning interests in wealthy companies, to retain property without fully paying unsecured creditors in a chapter 11 plan.

Federal courts across the Unites States have typically interpreted the question as to what property a chapter 11 debtor may retain without violating the absolute priority rule with two interpretations, the “broad” view and the “narrow” view.

Until Zachary, the Ninth Circuit applied the broad view holding that Congress intended to include the entirety of the bankruptcy estate as property that the individual debtor may retain, thus effectively eliminating the absolute priority rule in Chapter 11 for individual debtors. This view allows an individual debtor to retain most prepetition and postpetition property, including a cram down of a creditor’s claim despite its objection.

Courts applying the “narrow” view hold “that the BAPCPA amendments merely have the effect of allowing individual Chapter 11 debtors to retain property and earnings acquired after the commencement of the case that would otherwise be excluded under § 541(a)(6) & (7).” In re Maharaj, 681 F.3d 558, 563 (4th Cir. 2012). Thus, an individual debtor may not cram down a plan that would permit the debtor to retain prepetition property that is not excluded from the estate by § 541 but may cram down a plan that permits the debtor to retain postpetition property only.

In Zachary, the Ninth Circuit abandoned the “broad” view and adopted the “narrow” view by overruling Friedman. The result is that if a class of unsecured creditors objects to its treatment under a chapter 11 plan of reorganization, individual debtors in the Ninth Circuit must either pay the unsecured creditors in full or may not retain any non-exempt property.  Of course, a debtor may keep such property by providing new value to the bankruptcy estate for distribution to creditors.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

With over 50 million users, DocuSign is the most widely used eSIgnature and Digital Transaction Management platform globally. It allows users to complete and sign documents, and then send them to others for signature. Commercial users create personalized signatures on their tablets and other devices to facilitate the easy exchange of virtual “paperwork” such as health care documents, sales contracts, lease agreements, and any other financial documentation.

Bankruptcy debtors are required to declare under penalty of perjury that the information in the required documentation that they file with the U.S. Bankruptcy Court is true and correct to the best of their knowledge.

Most bankruptcy courts and bankruptcy attorneys require that debtors sign some original declaration verifying this fact. In this same declaration, debtors also permit the electronic filing of their documentation, which means that their bankruptcy schedules and statements may be filed online with signatures generated by a computer program. At some point, a document with a genuine signature must also be filed with or acknowledged before the court, and this is first and foremost what this declaration accomplishes.

Recently, The Eastern District OF California affirmed this in a California bankruptcy case, In re Mayfield, No. 16-22134-D-7, 2016 WL 3958982, at *3 (Bankr. E.D. Cal. July 15, 2016).

In Mayfield, debtor’s counsel for the debtor filed the petition, schedules, statement of financial affairs, statement of current monthly income, statement of intention, verification of master address list, and statement of social security number, all with signatures that had been created electronically with DocuSign. But the debtor never executed any document or “declaration” with a true, original signature permitting the electronic filing of these documents.

Pursuant to Bankruptcy Rule 9004–1(c) (1) (C) and (D), federal law requires original signatures, or that counsel has copies of the documents with the original signatures. During the first meeting of creditors, counsel could not produce the original signatures when requested to do so by the bankruptcy trustee for review as required by Rule 9004–1(c) (1) (D), since, in this case, the documents never existed. Counsel for the debtor unsuccessfully argued that documents with signatures generated by DocuSign are original signatures, mainly because such signatures are accepted in a commercial context for all types of business transactions.

The court rejected this argument and held the DocuSign affixation is only a software generated signature. Because counsel could not produce some originally signed copy of the required documents and represent that they were in his possession at the time of filing, he failed to meet the requirements of Bankruptcy Rule 9004-1. Thus, while the Court noted that Bankruptcy Rule 9004-1 made a distinction between an “originally signed document” and a “software–generated electronic signature”, the latter is acceptable provided that counsel has and retains possession of any document containing an “original signature.”

Part of the court’s reluctance to accept the signatures generated by DocuSign was based on its belief that documents could be easily manipulated or forged if some other party like the debtor’s spouse, child, or roommate had access to his computer and the button to electronically sign any document signature pages.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

In a decision regarding enforcement of predispute contractual waivers of jury trial, the California Court of Appeal found that even when the contract contains an otherwise valid choice-of-law clause in which the parties have agreed to be governed by the laws of a state that enforces such waivers, California fundamental public policy precludes enforcement of such predispute contractual waivers of jury trial.

In Rincon EV Realty LLC v. CP III Rincon Towers, Inc., 2017 S.O.S. 501, (First District, Div. Four) (1/31/17), the California Court of Appeal decided a case in which the borrower of funds for a San Francisco construction project contractually agreed with its lender to have the law of New York govern their transaction. Further, the borrower waived the right to jury trial to resolve any issues between the parties.

At the trial level, the plaintiff-borrower requested a jury trial on claims of fraud, breach of contract, and other violations of the agreement. The court decided that the choice-of-law clause and waiver were enforceable and granted the defendants’ motion to strike the jury demand. The trial court relied on Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459 in making its decision.

At the trial level, the plaintiff-borrower requested a jury trial on claims of fraud, breach of contract, and other violations of the agreement. The court decided that the choice-of-law clause and waiver were enforceable and granted the defendants’ motion to strike the jury demand. The trial court relied on Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459 in making its decision.

In reviewing the lower court’s decision, the Court of Appeal utilized principles set forth in § 187 of the Restatement Second of Conflict of Laws. Under the Restatement approach, a court must first determine (1) whether the chosen state has a substantial relationship to the parties or their transaction, or (2) whether there is any other reasonable basis for the parties’ choice of law. If neither of these tests is met, the court is not required to enforce the parties’ choice of law.

But the analysis does not end here if either of the foregoing tests is met. At this point, the court must determine whether the applicable state’s law, in this case, New York state law, is contrary to a fundamental policy of California. A court will then enforce the parties’ choice of law if there is no conflict between law and policy. However, should a fundamental conflict exist with California law, the court must then determine whether California has a ‘materially greater interest than the chosen state in the determination of the particular issue . . . .’ (Rest., § 187, subd. (2).)

Despite the court’s finding that there was a substantial relationship between the State of New York as the parties had conducted the entire loan transaction in New York, the Court of Appeal held that under Nedloyd, the choice of law was unenforceable and the validity of the jury waivers was governed by California law.

Section 631 of the California Rules of Civil Procedure state that the right to jury trial is “inviolate” and may only be waived in six different scenarios, which all apply only after a lawsuit is filed. Therefore, any predispute agreement specifying that any lawsuit between the contracting parties will be adjudicated in a court trial, rather than a jury trial, is unenforceable.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services, and advice for clients in all aspects of commercial compliance, business litigation, and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

The U.S. Court of Appeals for the Ninth Circuit held recently that the statutory cap on a landlord’s damages claim in a bankruptcy case only apply to claims arising directly from the termination of a lease, allowing landlords in the Ninth Circuit to pursue uncapped claims for damages not tied to lease termination.

The case — In re Kupfer — involved debtor tenants of two California commercial properties.  The debtors stopped paying rent and left the properties.  The landlords sued for breach of the leases and the issue was resolved via arbitration, which awarded the landlords past and future rent in the amount of $1.3 million as well as arbitration and attorneys’ fees totaling almost $200,000.

Subsequently, the debtors filed for Chapter 11 bankruptcy protection.  The landlords filed proofs of claim for the amount of the arbitration award.  The debtors argued that the entire award, including arbitration and attorneys’ fees, should be limited according to the damages cap per 11 U.S.C. § 502(b)(6), which provides that “the claim of a lessor for damages resulting from the termination of a lease of real property” are capped at “the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease…”

The landlords asserted that the cap should only apply to past due and future rent, but not to the fee award.  The bankruptcy court agreed and the district court affirmed.

On appeal to the Ninth Circuit, the sole question before the court was whether the arbitration and attorneys’ fees are included in the statutory cap.  Relying on its 2007 decision in In re El Toro Materials Co., the Ninth Circuit ruled that “damages other than those based on loss of future rent are not subject to the cap.”

However, since El Toro did not address the issue of caps on attorneys’ fees, the Ninth Circuit applied the Eighth Circuit’s test in In re Wigley: “Assuming that all other conditions remain constant, would the landlord have the same claim against the tenant had the lease not been terminated?”

The Ninth Circuit concluded that the arbitration and attorneys’ fees associated with litigation over the landlords’ claims for future rent were capped, since the claim would not have arisen had the debtors not terminated the leases.  However, the court found that since the arbitration award also included compensation for past rent, which the landlords were allowed to claim independent of the pre-petition lease termination, the arbitration and attorneys’ fees associated with past rent were not capped.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

On January 10, 2017, the U.S. Court of Appeals for the Ninth Circuit ruled in FDIC v. BancInsure, Inc. that claims of wrongdoing brought by the FDIC as receiver for Security Pacific Bank are subject to the insured vs. insured exclusion in a D&O policy issued by BancInsure, Inc.

After Security Pacific halted operations, the State of California appointed the FDIC as the bank’s receiver.  Subsequently, the FDIC brought claims against the bank’s officers and directors for allegedly causing the bank’s losses.  The defendants sought coverage under a BancInsure D&O policy, which denied coverage based on the policy’s insured vs. insured exclusion.  The policy included an exclusion for any claims “by, or on behalf of, or at the behest of, any other Insured Person, the Company, or any successor, trustee, assignee, or receiver of the Company except for . . . a shareholder’s derivative action brought on behalf of the Company by one or more shareholders who are not Insured Persons and make a Claim without the cooperation or solicitation of any Insured Person or the Company.”

A district court agreed with the FDIC’s argument that the shareholder derivative actions should apply because (1) its claims were similar to those asserted in shareholder suits; and (2) the FDIC succeeded to the interest of the bank’s shareholders.  However, the Ninth Circuit reversed that decision and remanded with instructions to enter judgment in favor of BancInsure.

In its ruling, the Ninth Circuit asserted that the FDIC’s claims “belong to the corporation — not to the shareholders — and the board of directors is primarily responsible for enforcing the corporation’s rights.”  The court explained that a claim can only be brought when a board of directors refuses or fails to enforce the rights of the corporation.

In addition, the court found that the term “receiver” in the BancInsure policy exclusion was unambiguous, noting that, “Interpreting the shareholder-derivative-suit exception to provide coverage to the FDIC’s claims may very well read the term ‘receiver’ out of the insured-versus-insured exclusion.  We think the term ‘receiver’ is clear and unambiguous and includes the FDIC in its role as receiver of Security Pacific.”

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

Following the passage of Proposition 64 that legalizes marijuana for adults over 21, California State Treasurer John Chiang has formed the Cannabis Banking Working Group to develop a plan for giving the state’s cannabis industry access to banking services later this year.

The group has been given a year to develop a solution to the conflict between state and federal laws that has made it necessary for marijuana businesses in other states where it is legal to operate in cash.  Federal law currently classifies marijuana as a Schedule 1 narcotic — the same as heroin — which makes most financial institutions wary of doing business with dispensaries and growers for fear they will face money laundering charges.

According to a 2015 report in American Banker, only 266 of the country’s 6,200 financial institutions serve marijuana-related businesses.  California estimates that its cannabis industry will take in $7 billion in profits in 2017 and pay $1 billion in state taxes.

The OC Register reported that Chiang has reached out to the state’s congressional delegation as well as to the incoming Trump administration seeking clarification on its stance regarding making banking services available to the marijuana industry.  Chiang said he does not foresee California creating a state bank specifically to serve growers and dispensaries, perhaps because Colorado tried a similar approach in 2014 but its application for a cannabis industry credit union was rejected by the Federal Reserve.

The Cannabis Banking Working Group, which consists of 16 members, will meet throughout the state to discuss banking issues.  Group member Fiona Ma, Board of Equalization Chairwoman, noted, “The cannabis industry is the largest shadow economy in California.  Allowing them banking access would facilitate compliance and bring millions of dollars into our economy.”

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

The U.S. Court of Appeals for the Ninth Circuit recently ruled in In re New Investments, Inc. that a debtor may only cure a contractual default under a Chapter 11 reorganization plan by fulfilling the contract’s post-default interest rate provisions. This decision overturns the Ninth’s Circuit’s 1988 rules in In re Entz-White Lumber & Supply, Inc. and joins several other circuit courts in requiring a debtor to pay default interest.

In the case, the debtor obtained a $3 million loan from the lender, Pacifica L 51, LLC, to buy a hotel. The loan called for an eight percent interest rate and in case of default, the interest rate increased to 13 percent. The debtor defaulted on the note and filed Chapter 11 bankruptcy. Under a reorganization plan, the debtor proposed to sell the hotel and use the proceeds to pay the outstanding loan debt at the eight percent interest rate. The lender argued that a 1994 amendment to the Bankruptcy Code — Section 1123(d) — required the debtor to fulfill the default cure obligations under the loan agreement.

In Entz-White, the Ninth Circuit held that when a default is cured under a reorganization plan, the debtor can avoid default provisions in loan documents, including higher interest rates. Section 1123(d) of the Bankruptcy Code, enacted six years following the Entz-White decision, provided that, “if it is proposed in a plan to cure a default the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.”

In New Investments, the Ninth Circuit held that under Section 1123(d), the lender was entitled to obtain interest at the 13% default rate, finding that “Subsection § 1123(d) renders void Entz-White’s rule that a debtor who proposes to cure a default may avoid a higher, post-default interest rate in a loan agreement.”

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

A bill introduced in Congress by Rep. Blaine Luetkemeyer entitled the “Systemic Risk Designation Improvement Act of 2016” (H.R. 6392) aims to amend Dodd-Frank to change the criteria for labeling financial institutions as a systemically important risk, leading to reduced regulation for smaller banks.  It passed the House by a vote of 254-161 on December 1, 2016, and is now in the Senate for a vote.

Dodd-Frank requires that the Federal Reserve closely monitor banks that have assets of $50 billion or more.  H.R. 6392 amends Dodd-Frank to eliminate the $50 billion threshold in favor of a higher minimum asset level to determine whether or not a bank is “systemically important.” Financial institutions that carry this label are subjected to enhanced scrutiny.

In addition, H.R. 6392 would require that the Financial Stability Oversight Council employ a more comprehensive process to assess whether a bank’s holding company poses any risk to U.S. financial stability before labeling it as “systemically important.”

Supporters of the legislation say that these changes would improve regulators’ abilities to more accurately assess a financial institution’s actual risk rather than relying solely on asset size.  Some of the factors the FSOC would consider if the bill passes include size, complexity, interconnectedness, cross-jurisdictional activity and available substitutes.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

In a final decision regarding an administrative enforcement action involving unlicensed lender activity under the California Finance Lenders Law (CFLL), California Department of Business Oversight (DBO) Commissioner Jan Lynn Owen determined that a business does not have to fund loans in order to be considered a lender under Cal. Fin. Code § 22009.

According to the December DBO Monthly Bulletin, Owen’s decision upholds a desist and refrain order against Pioneer Capital for unlawfully engaging in lending without a CFLL license.  Pioneer had argued that it should not be considered a lender because it does not self-fund loans, instead turning to outside sources for funding.  The Commissioner rejected that argument:

The Commissioner’s decision hinged on the interpretation of Financial Code section 22009.  For purposes of determining when a CFLL license is required, the section defines a finance lender as any person who “engages in the business of making consumer loans or making commercial loans.”  It goes on to specify that the business of making loans “may include lending money and taking … security …”

Pioneer argued the section should be interpreted to require a license only when the person funds loans and takes security.  In rejecting that argument, the Commissioner said use of the term “may” meant that lending money and taking security are “indicia” and not an exhaustive list of the factors that determine when a person is engaged in the business of making commercial loans.

Other activities that could factor into that determination, the Commissioner said, include Pioneer’s lending-related activities.  The Commissioner also noted Financial Code section 22001 requires the CFLL to be liberally construed.

The case is In the Matter of the Desist and Refrain Order Against Financial Services Enterprises, dba Pioneer Capital (OAH No. 2016040551).

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.