Glass & Goldberg | Financing, Property & Bankruptcy Law

A California appeals court has ruled in LSREF2 Clover Property 4, LLC v. Festival Retail Fund 1, LP that California’s anti-deficiency statutes prohibiting lenders from obtaining deficiency judgments against borrowers following a nonjudicial foreclosure do not extend to guarantors unless the guarantor is proven to be the principal borrower.  The appeals court reversed the trial court’s ruling in favor of the defendant, finding the evidence did not support the trial court’s conclusion that the guarantor was the principal borrower.

In 2007, Festival Retail Fund 1, LP (“Festival Fund”) purchased commercial real estate property in Beverly Hills, California.  Festival Fund formed a single purpose entity (SPE) called Festival Retail Fund I 357 N. Beverly Drive, LP (“Festival 357”) to take title to the property.  In addition, Festival Fund created a wholly owned LLC called FRF1 357 N. Beverly Drive, LLC (“FRF1”) as the general partner of Festival 357.  Festival 357 then borrowed $25 million from a bank and, as part of that loan agreement, signed a written guaranty of $1.5 million of the loan amount.

In 2011, Festival 357 defaulted on the loan.  The bank’s assignee, LSREF2 Clover Property 4, LLC (“Clover Property”), completed a nonjudicial foreclosure on the property and purchased it a trustee’s sale for approximately $17.5 million.  Clover Property then pursued a deficiency judgment against Festival Fund under the $1.5 million guaranty.

Festival Fund contended at trial that it was protected under California anti-deficiency statutes because it was the alter ego of FRF1, which was liable for the loan as the general partner of Festival 357.  Festival Fund claimed that it was the alter ego of FRF1 because it was FRF1’s sole owner and because FRF1 did not follow corporate formalities.   Therefore, Festival Fund contended it was a principal obligor on the loan and protected under California anti-deficiency statutes.

The appellate court disagreed, finding that the evidence failed to show that Festival Fund was the true principal obligor.  The court said that, when determining if a guaranty is a sham, the guaranty must constitute an attempt to circumvent anti-deficiency laws.  In this case, the court found that Festival Fund failed to show the lender structured the loan to circumvent anti-deficiency laws by designating Festival Fund as the guarantor instead of the borrower.  The ownership structure was created by Festival Fund, not the lender, before the loan was made.

The court also said that the lender’s requirement of a guaranty from Festival Fund does not in and of itself indicate the guaranty is a sham, noting, “In basically all instances, a guarantor will have some relationship to the borrower; people do not often agree to answer for the debts of total strangers.”

In addressing Festival Fund’s contention that FRF1 was the alter ego of the borrower because it did not follow corporate formalities, the court said, “To allow a guarantor to avoid its obligations simply because the debtor’s general partner – which is owned entirely by the guarantor – avoided complying with corporate necessities would work an absurdity. Guarantors could choose to avoid liability by instructing their affiliated companies to disregard corporate formalities.”

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 Delaware bankruptcy court has ruled that a creditor’s reclamation rights survive a lender’s security interest when the proceeds from that lender’s post-petition loan are used to repay a debtor’s pre-petition loan.

The case — In re Reichhold Holdings US Inc. — involved a North Carolina manufacturing company (Reichhold) that filed Chapter 11 bankruptcy in 2014.  Reichhold had an outstanding pre-petition loan with Oaktree Capital Management, L.P., which held a blanket lien on almost all Reichhold assets.  After filing bankruptcy, Reichhold obtained a post-petition loan (known as a debtor-in-possession or DIP loan) that was secured by a first priority lien on all pre- and post-petition property and used the DIP loan to repay Oaktree.

Following Reichhold’s Chapter 11 filing, one of its suppliers, Covestro LLC, sent a written reclamation demand to Reichhold.  Reichhold claimed that the reclamation demand had no value once the pre-petition loan was repaid by the DIP loan.

The Delaware bankruptcy court considered whether the pre- and post-petition loans were related and concluded that they were separate transactions.  The court found that the repayment of the pre-petition loan with proceeds from the DIP loan did not affect Covestro’s reclamation rights, noting that the DIP loan’s first priority lien did not attach to property that was “subject to valid, perfected and non-avoidable liens or to valid liens in existence as of the Petition Date that are subsequently perfected as permitted by section 546(b) of the Bankruptcy Code.”

In addition, the court emphasized, “Covestro’s reclamation rights arose before the DIP Lenders’ security interest attached, and the DIP Lenders’ lien was expressly subject to reclamation rights under section 546.”

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 September 25, 2016, California Gov. Jerry Brown signed two new bills into law that further restrict the use of arbitration agreements in the state.

Senate Bill 1241 amends California Labor Code to prohibit employers from requiring that, as a condition of employment, employees who live and work primarily in the state must agree to adjudicate outside of California any claim arising in the state.  Any provision in a contract that violates this prohibition would be declared void and, upon request by the employee, the dispute would then be adjudicated in California under California law.  This new law applies to both litigation and arbitration and takes effect on January 1, 2017.

Senate Bill 1007 adds Section 1282.5 to the Code of Civil Procedure to provide a party to an arbitration with the right to have a certified court reporter transcribe any deposition, proceeding or hearing with the transcript becoming the official record of the proceeding.  If an arbitration agreement does not provide for a certified court reporter, the party requesting the transcription will be responsible for paying for it.  If an arbitrator refuses to allow a court reporter to transcribe any proceeding, the party making the request for the transcription has the right to petition a court to compel the arbitrator to grant the request.  The new law does not provide grounds for vacating or correcting an award under California law.

It is too early to tell how California courts may apply these provisions to arbitration agreements or proceedings in litigation where the Federal Arbitration Act (FAA) may apply.  However, one appellate court has found that the FAA trumps California law on staying judicial proceedings when arbitration is compelled (Rodriquez v. American Technologies Inc.).

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 2011 U.S. Supreme Court ruling in Stern v. Marshall that concerned the litigation of non-bankruptcy issues in bankruptcy court has led to the development of the Stern Amendments to the Federal Rules of Bankruptcy Procedure, which will become effective on December 1, 2016.

The Stern Amendments alter Bankruptcy Rules 7008, 7012, 7016, 9027, and 9033 as follows:

General Rules of Pleading (BR 7008) — Litigant may state whether he/she does or does not consent to a final determination by a bankruptcy court.  This change eliminates the prior requirement that the pleader state whether the proceeding is core or non-core.

Defenses and Objections (BR 7012) — In regard to responsive pleading, eliminates the core/non-core distinctions in favor of the granting or withholding of consent to resolve an issue in the bankruptcy court.

Pretrial Procedures (BR 7016) — Provides the bankruptcy court with three options:

1. Hear and determine the dispute
2. Hear and issue proposed findings of fact and conclusions of law for district court
3. Take some other action

Removal (BR 9027) — In regard to removal, eliminates the core/non-core distinctions in favor of the granting or withholding of consent to resolve an issue in the bankruptcy court.

Proposed Findings of Fact and Conclusions of Law (BR 9033) — Makes the service of proposed findings of fact and conclusions of law applicable to both core and non-core proceedings.

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 September 22, 2016, California Governor Jerry Brown signed SB 777 into law, a bill that restores a de minimus exemption to the California Finance Lenders Law (CFLL) to allow a person or entity that makes one commercial loan per year to be exempt from the CFLL’s licensing requirement.

Under the CFLL, a finance lender is required to obtain a license from the state if they are “engaged in the business” of making commercial or consumer loans.  Since the CFLL does not define the phrase, “engaged in the business,” it may be difficult to distinguish between someone who is truly engaged in the loan business and someone who only makes loans occasionally.

Until 2014, the CFLL did not apply to those who made no more than one loan per year as long as it was a commercial loan.  In 2013, the California legislature increased this limit to no more than five loans and added a proviso that the loans had to be incidental to the business of the person relying on the exemption.  However, this proviso had the effect of limiting rather than expanding the exemption for many.  For example, an entity formed for the sole purpose of making one commercial loan could be required to be licensed since the loan was not “incidental” to the business.

SB 777 was sponsored by a community development corporation seeking to engage in New Markets Tax Credit financing, which requires the creation of an entity specifically for making these loans.  The new law, which goes into effect on January 1, 2017, is as follows:

SECTION 1. Section 22050.5 is added to the Financial Code, to read:

22050.5. (a) This division does not apply to any person who makes one loan in a 12-month period if that loan is a commercial loan as defined in Section 22502.

(b) This section shall remain in effect only until January 1, 2022, and as of that date is repealed.

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. District Court for the Central District of California has ruled in favor of the Consumer Financial Protection Bureau (CFPB) in its suit against payday lender CashCall, holding that a tribal bank that originated its loans was not the “true lender,” and therefore the high interest rate loans were subject to California’s usury limits.

In the case — Consumer Financial Protection Bureau v. CashCall, Inc. — the CFPB alleged that California-based CashCall had engaged in unfair, deceptive and abusive acts and practices by collecting on loans with interest rates above the usury caps in the borrowers’ home states.  CashCall contended that since it had a contractual relationship with Western Sky Financial, a tribal entity based on the Cheyenne River Indian Reservation, to purchase and service the loans, it was not the true lender.  The loan agreements that CashCall made with Western Sky included a choice-of-law provision that applied the law of the Cheyenne River Indian Reservation to the loans, which CashCall argued voided the application of state usury laws to the loans.

In finding for the CFPB, the Court disregarded the choice-of-law provision and focused on the “true lender” status of CashCall.  The Court found that CashCall, not Western Sky, was the “true lender” based on which entity had the “predominant economic interest” in the loans.  The facts of the case showed that CashCall deposited funds into a reserve account for Western Sky to fund the loans, purchased each loan from Western Sky prior to any payments being made, and bore the entire risk of default. Therefore, the Court reasoned, CashCall was the true lender and since the company was based in California, there was no reason to apply tribal law to the loans.

The Court also found that CashCall violated the federal Consumer Financial Protection Act (CFPA) by employing deceptive practices in servicing and collecting on loans where payment was not due or owing.  In addition, the Court found that the Western Sky loan agreements were either void or uncollectable in 16 states.

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 Consumer Financial Protection Bureau (CFPB) has proposed a new rule that would allow the Bureau to share confidential supervisory information with state attorneys general and other agencies that do not have supervisory jurisdiction over CFPB-regulated institutions.

The proposed Amendments Relating to Disclosure of Records and Information seeks to amend the Bureau’s disclosure rules under 12 CFR 1070.43.  If implemented, the new rule would:

• Increase the number of agencies that could gain access to confidential supervisory information to include “Federal, State, or foreign governmental authority, or an entity exercising governmental authority” whether or not that agency has jurisdiction over the company whose confidential supervisory information is being shared.
• Change the standard for disclosure of confidential supervisory information from agencies “having jurisdiction over a supervised financial institution” to disclosure of confidential supervisory information if it is “relevant to the exercise of the Agency’s statutory or regulatory authority.”
• Remove the decision-making authority over the release of confidential supervisory information from the CFPB General Counsel to the head of Supervision, Enforcement and Fair Lending.

The proposed rule would relax the standard for disclosing confidential supervisory information, instead applying the more subjective standard for non-supervisory confidential information.  The CFPB has not stated a reason for the new proposed rule other than to note that it has reached a better interpretation of Section 1022 of Dodd-Frank.

The public comment period for the proposed rule ends on October 24, 2016.

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 Fourth Circuit has ruled that filing proofs of claim in a Chapter 13 bankruptcy for time-barred debts does not violate the Fair Debt Collection Practices Act (FDCPA) where state law preserves the right to collect on the debt.

The Fourth Circuit ruling joins the Second, Seventh and Eighth Circuit Courts of Appeals in splitting with the Eleventh Circuit’s ruling in Crawford v. LVNV that such proofs of claim were a violation of the FDCPA.

The case — Dubois v. Atlas Acquisitions LLC — was a consolidated appeal of two cases where debt buyers filed proofs of claim in Chapter 13 cases on loans that exceeded Maryland’s three-year statute of limitations.  The debt buyers conceded that the claims were time-barred, but asked the bankruptcy court to dismiss the FDCPA violation claims.  The bankruptcy court agreed with the debt buyers that filing a proof of claim is not a debt collection activity under the FDCPA.

On appeal, the Fourth Circuit found that under the FDCPA, a proof of claim filing on a time-barred debt is debt collection, even if no payment is demanded or if the bankruptcy court disallows the claim.  The Court then considered whether a time-barred debt could be considered a claim under the Bankruptcy Code and found that that it could, since the term “claim” is intended to have “the broadest possible definition” as relates to the right of repayment as defined by state law.

The Court held that a time-barred debt is a claim under Maryland law, stating that the statute of limitations “does not operate to extinguish [a] debt, but to bar its remedy.”  In addition, since Maryland law states a statute of limitations can be revived if the debtor sufficiently acknowledges the debt, the Court found that Maryland law recognizes the right of repayment on a time-barred debt, allowing for the filing of a proof of claim in bankruptcy.

Further, the Court noted that a debt does not have to be enforceable in order to be considered a “claim.” In addition, the Court held that the bankruptcy process allows for the filing of proofs of claim on time-barred debts, finding that while such proofs of claim are disallowed, “the Code nowhere suggests that such debts are not to be filed in the first place.”

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 an interesting legal twist, a U.S. District Court Judge in Las Vegas has allowed a debt collection company facing a consumer lawsuit to buy that lawsuit and then successfully petition the court to have the suit dismissed.

Clark County Collection Service (CCCS) sent a notice to Patricia Arellano of Las Vegas to collect a $370 debt for overdue medical bills.  Arellano failed to respond and CCCS obtained a default judgment against her.  Arellano then sued CCCS for violating the Fair Debt Collection Practices Act (FDCPA), alleging that CCCS misled her about how much time she had to settle the debt.  She also claimed that the debt collection company’s name implies it is affiliated with Clark County, Nevada, when it is not.

In an effort to enforce the judgment, CCCS obtained a writ of execution against Arellano and the Clark County Sheriff was required to sell off her property to satisfy the debt.  That property included her outstanding claim against CCCS.  During the Sheriff’s auction, CCCS purchased Arellano’s claim against it for $250.

CCCS then filed a motion to dismiss the suit in federal district court, saying it did not want to sue itself.  Arellano opposed the motion.  However, U.S. District Judge Jennifer Dorsey ruled for CCCS, saying that the case “presented an interesting situation.”

Washington-based appellate law expert Deepak Gupta is now representing Arellano in an appeal to the Ninth Circuit, saying that if CCCS prevails in this tactic, other debt collectors are likely to follow suit, which will erode FDCPA protections for consumers.

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.