Glass & Goldberg | Financing, Property & Bankruptcy Law

The Ninth Circuit Bankruptcy Appellate Panel has ruled in In re Beltway One Dev. Grp., LLC, that an oversecured creditor is entitled to pendency default interest when that creditor’s claim is not cured by a reorganization plan.

Beltway One secured a $10 million loan from Wells Fargo Bank, N.A., prior to its voluntary bankruptcy filing. Both parties agreed that Wells Fargo was oversecured. Beltway’s reorganization plan included an extension of the loan’s maturity date to 30 years with a cramdown interest rate of 4.25% and a balloon payment at maturity.

Wells Fargo objected to the plan, stating that as an oversecured creditor, it was entitled to pendency default interest (default interest accruing during the bankruptcy case) under Section 506(b) of the Bankruptcy Code since the bank’s claim was not cured under the plan.

While conceding that the bank’s claim was not cured, Beltway argued that the bankruptcy court had “equitable discretion” under In re Entz-White Lumber and Supply, Inc. (9^th Cir. 1988) to limit pendency interest. The bankruptcy court denied Wells Fargo’s pendency interest claim and confirmed Beltway’s plan.

On appeal, the Ninth Circuit BAP reversed, finding that “an oversecured creditor can record pendency interest as part of its allowed claim, at least to the extent it is oversecured.”  The BAP noted that Wells Fargo’s claim was not cured under Beltway’s plan because the plan included a new interest rate, new term and new amortization schedule. This made Beltway’s argument citing Entz-White inapplicable, since a court’s equitable discretion under Entz-White is limited to instances where a plan “cures and nullifies all consequences of default, but fails to establish the appropriate postpetition interest rate under the contract or applicable state law.”

In its decision, the BAP cited General Elec. Capital Corp. v. Future Media Prods., Inc., where the Ninth Circuit had ruled that an oversecured creditor is entitled to “a presumption of allowability for the contracted default rate of interest provided that the rate is not unenforceable under applicable non-bankruptcy law.” Thus, the debtor bears the burden of proof that the pendency default interest rate is unenforceable under applicable non-bankruptcy law.

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 May 16, 2016, the U.S. Supreme Court rendered a decision in Husky International Electronics, Inc. v. Ritz, finding that the term “actual fraud” as used in Section 523(a)(2)(A) of the Bankruptcy Code is sufficiently broad to include fraudulent conveyances and does not require a false representation for the debt to be non-dischargeable in bankruptcy.

Husky is an electronics component supplier that sold products to Chrysalis Manufacturing Corp. Daniel Ritz was a director at Chrysalis and owned 30% of the company’s stock. Chrysalis incurred a debt of approximately $164,000 owed to Husky and rather than satisfy this debt, Ritz transferred substantial Chrysalis assets to other entities he controlled. Husky sued Ritz for the debt, alleging that the transfers constituted actual fraud, and Ritz subsequently filed for Chapter 7 bankruptcy relief.

Husky commenced an adversarial proceeding in Ritz’ bankruptcy case, asserting that the transfers of Chrysalis assets constituted actual fraud and the debt was non-dischargeable under Section 523(a)(2)(A) of the Bankruptcy Code. The bankruptcy court found that Husky had not proven actual fraud. On appeal, a district court found that Ritz was personally liable under state law but that the debt itself was not obtained by actual fraud and count not be excepted from discharge under Section 523(a)(2)(A). The Fifth Circuit Court of Appeals affirmed the district court’s ruling, finding that the debtor had to make an actual misrepresentation to the creditor to prevail under Section 523(a)(2)(A).

In a 7-1 decision, the U.S. Supreme Court reversed the Fifth Circuit, hold that the term “actual fraud” in Section 523(a)(2)(A) “encompasses forms of fraud, like fraudulent conveyance schemes, that can be effected without a false representation.”

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 May 16, 2016, the U.S. Supreme Court issued its decision in Spokeo, Inc. v. Robins, finding that consumers must show “concrete and particularized” injury in order to gain standing under Article III of the U.S. Constitution to sue for damages under the Fair Credit Reporting Act (“FCRA”).

In the proposed class action, Thomas Robins alleged that Spokeo, Inc., a website that aggregates public information on individuals, published inaccurate information about him. Robins alleged that Spokeo acted as a consumer reporting agency and violated the FCRA by failing to provide him with mandated notices.

Spokeo filed a motion to dismiss based on standing, which a district court initially denied and then reconsidered and granted. The court found that Robins had failed to plead an injury-in-fact. Robins appealed to the Ninth Circuit, which reversed the district court’s decision, finding that Spokeo’s alleged violation of Robins’ statutory rights under the FCRA was injury enough to qualify under Article III.

The Ninth Circuit said that because the FCRA does not require proof of actual damages to proceed with a violation claim, a plaintiff’s statutory rights under the FCRA could be violated without proof that actual damages were suffered. The Ninth Circuit ruling joined the Sixth, Tenth and D.C. Circuits, which split with the Second and Fourth Circuits.

In its 6-2 decision, the U.S. Supreme Court found that “Robins cannot satisfy the demands of Article III by alleging a bare procedural violation,” reaffirming that an injury in fact to confer standing under Article III must be “both concrete and particularized.”

The Court vacated and remanded for further proceedings, stating that, “Because the Ninth Circuit failed to fully appreciate the distinction between concreteness and particularization, its standing analysis was incomplete.”

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 May 3, 2016, the Consumer Financial Protection Bureau (CFPB) issued a proposed rule that would prohibit banks and other financial institutions from including arbitration clauses in consumer contracts that would prohibit consumers from participating in class actions.

The proposed rule only applies to bans on arbitration clauses that prevent consumers from filing or participating in a class action lawsuit. Arbitration clauses that require consumers to resolve individual disputes via arbitration may still be used. The rule would require financial institutions to include the following phrase in every agreement:

“We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.”

The rule broadly defines the types of product and service contracts that must waive class action arbitration, including credit card agreements, checking and savings accounts, money transfer services, prepaid cards, installment loans, payday loans, auto loans, auto title loans, student loans and more.

The proposed rule would also require financial institutions to provide the CFPB with certain records pertaining to arbitration cases — including the original claim, any counterclaim, the arbitration agreement, any judgment or award and other documents — so that the agency can monitor the arbitration process for consumer fairness. The CFPB said that it intends to publish these records “with appropriate redactions” on its website in some form in the future.

The public has 90 days to comment on the proposed rule after it is published in the Federal Register. The CFPB has proposed that the rule go into effect 30 days after the final rule is published in the Federal Register.

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 divided three-member Ninth Circuit bankruptcy panel has ruled that restrictive covenants for affordable housing do not affect the valuation of a lender’s secured claim in a Chapter 11 bankruptcy cram down when those covenants are subordinate to a senior loan.

The case — In re Sunnyslope Housing Ltd. Partnership — concerns a 150-unit housing project that was financed by Sunnyslope with an $8.5 million senior loan guaranteed by the U.S. Department of Housing and Development (HUD) and junior loans from the City of Phoenix and the State of Arizona.

The project was qualified for a Low Income Housing Tax Credit (LIHTC), which — with the HUD and other loan guarantees — required Sunnyslope to record restrictive covenants that mandated the project be operated as affordable housing. The covenants and the junior loans were recorded as subordinate to the senior loan. In the event of foreclosure on the senior loan, all restrictive covenants would be extinguished.

Sunnyslope defaulted on the senior loan, which HUD assumed and resold to First Southern National Bank for $5 million. First Southern prepared to foreclose on the property and a receiver was appointed, who then found a buyer for the property for a sale price of $7.6 million. Before the sale occurred, Sunnyslope filed for Chapter 11 bankruptcy and included retainership of the property in its reorganization plan. In order to retain the property over First Southern’s objection, Sunnyslope was required to implement a repayment plan under the cram-down provision of the Bankruptcy Code.

First Southern and Sunnyslope disagreed over the property’s valuation under the cram down, with Sunnyslope proposing a $2.5 million valuation due to the affordable housing covenants that restrict the amount of rent that could be charged. First Southern proposed a valuation of $7 million under Section 506(a), contending that a foreclosure would extinguish the restrictive covenants that capped rent amounts.

Both the bankruptcy court and district court agreed with Sunnyslope. First Southern appealed to the Ninth Circuit, which reversed with a strong dissent. The majority noted that the restrictive covenants impairing the property’s value were found only in mortgages that were junior to the senior loan and, relying on the 1997 U.S. Supreme Court decision in Associates Commercial Corp. v. Rash, “that it was erroneous to factor the restrictive covenants into the replacement value of Sunnyslope.”

The panel split on the meaning of the word “use” in determining the value of secured claims as decided in Rash and as used in Section 506(a)(1):

Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.

The majority found “use” to mean simply an alternative to the surrender of the property to the secured creditor, and not to mean a particular use that the debtor had planned for the property. The majority said that there was nothing in Rash that “”supports the proposition that the replacement value of the property should be measured by the income that can be generated when used in the specific way that the debtor elects to use it.”

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.

California Attorney General Kamala Harris has announced her support of S.B. 1150 — the Homeowner Survivor Bill of Rights — that would add a provision to the California’s Homeowners Bill of Rights (HBOR) to protect widowed spouses and children from foreclosure after the primary mortgage holder dies.

The bill was introduced in February 2016 to close a loophole in HBOR that fails to provide surviving spouses and children with important protections against foreclosure that are available to other homeowners.

S.B. 1150 clarifies the responsibilities of a mortgage lender or servicer when a primary mortgage holder dies and a successor wishes to assume the home loan. The bill requires mortgage servicers to:

• Provide accurate information about assuming the loan and foreclosure prevention alternatives;
• Provide successor with a single point of contact;
• Allow a successor to either assume the existing loan, unless an assumption is prohibited by the loan terms, or provide the successor with a foreclosure prevention alternative upon request and, if the successor qualifies for the foreclosure prevention alternative, allow the successor to assume the loan.

In addition, mortgage servicers cannot record a notice of default until the servicer both (1) requests documentation of the death of the borrower in writing and provides 30 days for receipt of that documentation, and (2) requests written documentation from a claimant regarding his or her status as a successor in interest in the property and provides 90 days for receipt of that documentation.

“Following the devastating loss of a loved one, too many Californians also face the possibility of being stripped of their home,” Harris said. “This proposed legislation requires mortgage servicers to communicate with spouses and children of deceased homeowners and gives them a fighting chance to stay in their homes.”

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 February 26, 2016, the Financial Accounting Standards Board (FASB) released a new lease accounting standard that adds leases to the balance sheets of U.S. companies as “operating obligations” rather than debt. The new standard will go into effect for publicly traded companies on December 15, 2018, and for private companies on December 15, 2019.

The Equipment Leasing and Finance Association (ELFA) recommends that companies preparing for the changeover to the new lease account standard take these five steps to ensure a smooth transition:

1. Conduct an inventory of all equipment lease and rental contracts. In order to determine your company’s accounting needs under the new standard, you will need to have a complete understanding of your lease terms and contractual obligations.

2. Assess accounting technology needs. Begin discussions with your accounting software supplier about how they will support the new standard so you can determine your technology needs.

3. Review debt covenants. Discuss any potential implications on your debt covenants with your bank or creditors to see if the accounting changes will have any effect. The FASB has said that the long lead time for implementation of the rule makes it likely that these covenants would mature or be updated before it becomes an issue. The FASB also noted that technically, the leases will be considered operating obligations, not debt.

4. Seek professional help. Beyond obtaining accounting help, you should also consult with your equipment finance provider on best practices to assist you in determining the potential impact of the accounting changes on your leasing obligations.

5. Develop a plan. Use the information you’ve obtained to formulate a plan and identify the necessary resources for updating systems and technologies to support the new reporting rules.

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 putative class action suit has been filed in the U.S. District Court in the Eastern District of Pennsylvania against Bank of America for allegedly suing consumers in default on credit card debt after the bank had already relinquished its ownership interest by selling the debt via a securitization of a pool of accounts.

The case — Willard v. Bank of America, et. al. — was brought under the Fair Debt Collection Practices Act (FDCPA) and Pennsylvania debt collection statutes. Bank of America won a judgment against plaintiff G. Veronica Willard for unpaid credit card debt that Willard contends had been sold and purchased several times, eventually winding up with Wilmington Trust Co. Willard claims that since Bank of America did not require Wilmington to file a termination statement, the bank forfeited its ability to collect the debt via litigation.

According to the complaint, Willard alleges that the bank “engaged in a scheme whereby they issue credit cards to consumers and then seek to collect the amounts allegedly due from each card holder’s use of the credit card, despite the fact that B of A has sold, transferred, assigned or otherwise conveyed its beneficial interest in each consumer’s credit card account to a trust as part of a financial transaction known as a credit card securitization. Having relinquished its beneficial interest, B of A no longer has a debt obligation owed to it by Plaintiff or the Class.”

The proposed class action would include all U.S. residents sued by Bank of America to collect credit card debt already sold in absence of issuing a termination statement.

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 Second Circuit recently ruled in In re Tribune Co. Fraudulent Conveyance Litigation that the safe harbor under Section 546(e) of the Bankruptcy Code preempts creditors’ claims under state fraudulent transfer laws.

The Tribune Media Company was purchased via a leveraged buyout (LBO) in 2007 that involved borrowing more $11 billion, most of which was used to restructure Tribune’s debt and to buy out former shareholders. Following the LBO, Tribune filed for bankruptcy in the District of Delaware. The Delaware court authorized the unsecured creditors to pursue an intentional fraudulent transfer action to recover payments made to shareholders during the LBO, as intentional fraudulent transfer claims are not barred by Section 546(e) of the Bankruptcy Code.

Two groups of unsecured creditors — former Tribune employees with retirement benefit claims and successor indenture trustees for Tribune’s pre-buyout debt — brought suit, claiming that the transfers were constructive fraudulent conveyances under state law. Tribune argued for dismissal, stating that the creditors were prohibited from pursuing their claims due to the automatic stay and that Section 546(e) preempted state law constructive fraudulent transfer claims.

A district court held that the creditors’ claims were barred by the automatic stay but that Section 546(e) only applied to the claims of a bankruptcy trustee and not to state law governing fraudulent transfer claims.

On appeal, the Second Circuit reversed, holding that creditors were not enjoined by the automatic stay from pursuing their claims. However, the Court dismissed those claims, finding that Section 546(e) preempted the claims under state fraudulent transfer laws. The Court noted, “Once a party enters bankruptcy, the Bankruptcy Code constitutes a wholesale preemption of state laws regarding creditors’ rights.”

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.