Glass & Goldberg | Financing, Property & Bankruptcy Law

Under AB 3194, a recent bill signed into law by Governor Brown, builders should be able to more easily develop housing projects for low- and moderate-income households without interference from local governments. Another primary goal of the law is to make these types of housing projects more affordable for developers. Also, the bill’s legislative intent is for local governments to encourage urban infill rather than sprawling development into surrounding agricultural areas that may lack the infrastructure necessary for project completion.

Prior to the enactment of AB 3194, such projects could be blocked and delayed as local governments required further governmental action such as re-zoning prior to rendering approval of any proposed projects. Originating in the California Assembly, AB 3194, amends the Housing Accountability Act and theoretically eliminates existing legal loopholes and adjusts zoning standards. Pursuant to the law, housing projects for low- and moderate-income households, as well as emergency shelters, are considered to meet applicable zoning standards.

Instead of requiring a housing developer to prove that a project meets local zoning rules, AB 3194 shifts the burden and requires that a local government may only reject a proposed housing development if it provides written evidence that:

• The local government has already met its regional need for low- and moderate-income housing;
• The new development would have a specific negative impact on the health or safety of residents;
• approving the development would violate a specific federal of state law;
• the proposed development is situated on and surrounded on at least two sides by agricultural or resource land;
• the proposed project site lacks the adequate water or wastewater facilities necessary to accommodate the housing development; or
• the development is inconsistent with both local zoning rules and the general plan at the time of the completed application, and the area has adopted a lawful, revised housing element in compliance with 2015 law to meet statewide housing goals. [Calif. Government Code 65589.5(d)]

This bill, like many pieces of successful and unsuccessful proposed legislation before it, attempts to address California’s seemingly never-ending housing crisis. A low rate of newly constructed of low- and moderate-income housing has driven up rent costs for individuals while hampering the home sales volume recovery.

AB 3194, sponsored by the California Building Industry Association, will hopefully stimulate new construction, reduce costs for builders and end users, and increase opportunities for the ownership of homes. The bill’s ultimate intended results are growth in California’s economy and housing market.

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 California Residential Mortgage Lending Act (CRMLA) and the California Financing Law (CFLL), respectively in code sections Cal. Fin. Code §50501.5 and Cal. Fin. Code §22707.5, as well as the California Franchise Investment Law (CFIL) in Cal. Corporations Code §31406, empower the state’s Commissioner of Business Oversight to issue citations to offenders who violate the CFLL, CRMLA, and CFIL, or any rule or order issued pursuant to these California laws.

Under both the CFLL and CRMLA, If, upon inspection, examination, or investigation, the commissioner has cause to believe that a person or entity has violated the CFLL or the CRMLA, the commissioner may issue citations to compel violators to take corrective action. Under the CFIL, if, upon inspection or investigation, including such based upon a complaint, the commissioner has cause to believe that a person or entity has violated the CFLL or the CRMLA, the commissioner may issue citations requiring offenders to correct any violations.

A citation must particularly describe the basis for its issuance and may contain an order to desist and refrain from the illegal conduct involved. It may also include the assessment of an administrative penalty which may not exceed two thousand five hundred dollars ($2,500) per violation. The code sections providing authority for the issuance of a citation must be referenced therein, whether Cal. Fin. Code §50501.5, Cal. Fin. Code §22707.5, or Cal. Corporations Code §31406. All penalties collected under these sections are deposited in the State Corporations Fund.

Citations issued under CFIL must state that the citation is deemed final if, within 60 days from the receipt of the citation, the person cited does not notify the commissioner and express the intention to request a hearing. Citations issued under the CFLL and CRMLA only allow 30 days for an offender to request a hearing. A citation may provide a reasonable time period or periods by which any violations must be corrected.

Any citations issued or fines assessed pursuant to the CFLL and CRMLA, while constituting punishment for a violation of law, are considered in lieu of other administrative discipline by the commissioner for the offense or offenses cited, and the citation and payment of any ensuing fine by a licensee is not reported as disciplinary action taken by the commissioner. In contrast, the sanctions authorized under CFIL are separate from, and in addition to, all other administrative, civil, or criminal remedies.

The CRMLA and CFLL state that the commissioner must give due consideration to the appropriateness of the amount of the fine considering factors including the gravity of the violation, the good faith of the person or licensees cited, and the history of any previous violations.

After the exhaustion of the review procedures provided for in this section, the commissioner may apply to the appropriate superior court for a judgment in the amount of the administrative penalty and order compelling the cited person to comply with the order of the commissioner. The application shall include a certified copy of the final order of the commissioner and must contain sufficient evidence indicating that the issuance of the judgment and order was warranted.

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.

Some interesting and trendsetting news from Japan’s bankruptcy courts surfaced at the end of the summer of 2018. Nobuaki Kobayashi, the trustee of a hacked Japanese cryptocurrency exchange’s bankruptcy estate, opened an online claims submission process for interested parties to recoup their losses. What made this a potentially trailblazing event, was that Kobayashi, as trustee, had the ability to make distributions in bitcoin and BCH (bitcoin cash), in lieu of paying the claims’ value in fiat currency. More than some would say this is a significant procedural achievement for creditors and is likely a harbinger of the future.

The bankruptcy case’s debtor was Mt. Gox, which filed for bankruptcy relief in February 2014. The theft of 850,000 bitcoins, valued at more than $450 million, owned by the company and its customers precipitated the bankruptcy filing. An alleged internal crisis management document leaked to the public claimed that the company was insolvent, and placed the loss at 744,408 bitcoins, noting further that the theft was undetected for years. From February 1, 2014, until the end of March, the value of bitcoin declined by 36% worldwide.2014,

In the middle of August 2018, Kobayashi initiated the online claims submission process for creditors to recover their losses. This was extended to corporate creditors on September 22, 2018, and to transferees or claims purchasers on October 3, 2018. The trustee’s actions were the result of a June 22, 2018, order suspending Mt. Gox’s bankruptcy proceeding and commencing civil rehabilitation proceedings. This transition to a civil rehabilitation proceeding allowed Kobayashi to make the distributions in cryptocurrency.

On Sept. 26, 2018, the U.S. District Court for the District of Massachusetts ruled that bitcoin and other cryptocurrencies are “commodities,” under the Commodity Exchange Act’s definition. This follows legal debates related to classifying bitcoin as currency or commodity. The valuation of commodities is an important aspect of assessing the feasibility of Chapter 11 plans of reorganization. Given the unique, if not unprecedented, volatility of cryptocurrency as a bankruptcy asset, it remains to be seen the extent to which courts consider and value all types of cryptocurrencies in the multiple contexts of a bankruptcy proceeding.

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. Bankruptcy Code (Title 11), under § 363, allows a Chapter 11 bankruptcy debtor, acting in the capacity of a debtor-in-possession, to sell assets at auction, thus giving the debtor more control in their ultimate disposition than in a Chapter 7 liquidation case where a trustee may sell or transfer assets without the participation of a debtor-in-possession.

A § 363 sale has the potential advantage gained through an auction where participants submit bids competitively, and the final sales price closely reflects the best possible result for their disposition under the present circumstances, which may reflect a better alternative than reorganization. Potential buyers may purchase assets at a bargain price without any threat of a reversal of the sale while obtaining ownership of assets free and clear of any lien or claim.

A § 363 sale commissioned by the bankruptcy court benefits both debtors and creditors. Those debtors with no desire to reorganize potentially maximize any return from disposing of assets because of the competitive nature of the bidding process. Those who bid benefit by the possibility that they may acquire bargain-priced assets with court approval, free and clear of any lien or other claim. Of course, the auction must be legitimately conducted, and any sale must be made in good faith.

Creditors are still in a position to protect their interests in cases where a debtor-in-possession moves to dispose of assets. They may approve of or oppose any motions made by the debtor during the Chapter 11 bankruptcy case. The bankruptcy court must, therefore, consider the objection of a creditor before it approves a motion to approve a sale under § 363.

Also, a § 363 sale enables secured creditors to place a credit bid which may cancel some or all of the debtor’s obligation. When an asset used as collateral is put up for auction, the secured creditor is not limited to making a cash bid, instead, it may bid the amount of the underlying loan’s debt for which the asset served as collateral.

The transparent nature of bankruptcy proceedings means that the bids of purchasers are public information, which may increase the chances that a bidder is ultimately outbid by competitors. Sales that don’t conform to bankruptcy court mandates will not receive court approval. This includes sales not conducted in good faith, which may be reversed on appeal. There is always the possibility that another creditor may challenge the sale on valid grounds delaying or ultimately preventing the sale from occurring. The result: the process restarts, and more time and other resources are consumed.

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.

“Sears, America’s Store,” also known as Sears Holdings, after a 125-year run as one of America’s leading retailers, filed for bankruptcy protection October 15th after an extended number of years of barely remaining solvent. The company survived this long as a result of having billions of dollars of its CEO’s own money with which to maneuver financially. Eddie Lampert, the CEO of Sears for the past five years, will step down from his position as CEO, effective immediately, but will continue as Sears’ chairman of the board.

Listing $11.3 billion in liabilities and $7 billion in assets, Sears Holdings announced that it had appointed Mohsin Meghji, managing partner of M-III Partners, as its chief restructuring officer. The bankruptcy will result in the closing of 142 stores around the end of 2018, with sales to liquidate inventory and other assets to begin shortly after the bankruptcy filing. Sears has 68, 000 employees and approximately 700 stores, which have often been under-supplied as a result of product vendors who lost their trust in the company as a viable retailer. Many of these stores have never been visited by younger shoppers, who don’t consider the retailer to be an option for their retail needs.

More than ten years ago, Lampert merged Sears and Kmart, both which were struggling, with the hope that the combination of two weak entities would create one formidable competitor on the discount retail market. However, Sears’ debt continued to rise more than its profits as its new CEO failed to attract former and new customers, much more comfortable shopping online and purchasing products from Amazon and similar entities.

Lampert has a controlling ownership stake in Sears personally holding about 31 percent of its shares outstanding. His hedge fund ESL Investments owns about 19 percent. “ESL invested time and money in Sears because we believe the company has a future,” Mr. Lampert announced in a public statement made a few weeks ago. Thus, Sears also announced that ESL is negotiating a $300 million debtor-in-possession loan to currently sustain it, which is in addition to $300 million it has secured from investment banks.

An unfortunate but not unexpected circumstance is that the company’s vendors have significantly limited the number of products they will provide on credit, making it more difficult for Sears to compete during the vital holiday shopping season.

Here is a map of the 142 Sears and Kmart stores set to close

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 the case, In re Fagerdala USA-Lompoc, Inc., 891 F.3d 848 (9th Cir. 2018), the Ninth Circuit affirmed a creditor’s ability to block a debtor’s “cramdown” by purchasing junior debt to protect its own claim. The court reversed the bankruptcy court’s decision to designate claims for bad faith pursuant to 11 U.S.C. § 1126(e). In doing so, the court thereby sanctioned the creditor’s motive of purchasing claims to block the Chapter 11 plan for the purpose of protecting a pre-existing claim. Thus, Fagerdala illustrates that, in bankruptcy proceedings, at least in the Ninth Circuit, creditors may purchase claims to protect their economic interests.

The basis for the Ninth Circuit’s decision was that a creditor acting in its self-interest by purchasing unsecured claims to block “cramdown” did not constitute bad faith unless the evidence showed the creditor acted with a motive ulterior to the purpose of protecting its economic interest in the bankruptcy case.

Suggested examples of “ulterior motive” by the court were a creditor purchasing claims to block litigation against it, a competitor purchasing debt to eliminate the debtor’s business and improve its own, or a debtor having an insider purchase claims. With its holding that any bad faith analysis under 11 U.S.C.  § 1126(e) requires evidence of some “ulterior motive,” the Ninth Circuit has apparently made it clear that a non-creditor or strategic investor purchasing claims to better itself at the expense of the Chapter 11 debtor will constitute “bad faith.’

The holding mandates that a bankruptcy court may not designate or disqualify claims for plan voting purposes based on bad faith under 11 USC § 1126(e) on the mere findings that a creditor did not offer to purchase all the claims available in order to block a plan of reorganization, and/or a creditor’s purchase of claims to block a plan would have a negative effect on the interests of other creditors.

In Fagerdala, a creditor held a senior lien fully secured by the debtor’s real property. The debtor’s proposed Chapter 11 plan of reorganization attempted to extend and modify (cramdown) the terms of the mortgage without the consent of this creditor. To block the debtor’s proposed plan, the creditor then purchased a majority of the general unsecured class of claims and voted against the plan.

The debtor moved to designate (disqualify) the lender’s votes of the purchased unsecured claims under 11 USC § 1126(e) based on the lender allegedly not acquiring the unsecured claims in good faith. The evidence showed that the creditor did not offer to buy each and every claim in the unsecured class.

The bankruptcy court agreed with the debtor and granted designation, finding bad faith in the creditor’s outright purchase to place it in a “blocking position” of unsecured claims that was “highly prejudicial” to and would result in an “unfair advantage” over those unsecured creditors who did not receive a purchase offer and who also held the majority of the unsecured debt. The bankruptcy court focused on the “negative effect of the action” to the other creditors, and that: “as ‘a matter of law,’ it was not going to consider [the creditor’s] motivation or rationale for offering to purchase only a subset of claims.” Fagerdala. at 853.

The Ninth Circuit reversed the bankruptcy court’s designation of the lender’s purchased claim and confirmation of the debtor’s plan. In doing so, it stated that the bankruptcy court erred in making a finding of bad faith without evidence of an ulterior motive, and when it failed to make actual findings of the creditor’s particular motivation for purchasing the claims.

Thus, this case reminds us that in California, and every other location within the Ninth Circuit, creditors may purchase claims to protect and defend their economic interests in bankruptcy proceedings. Fagerdala also makes it clear to third-party non-creditors or investors looking to purchase claims offensively to gain some benefit or advantage over a Chapter 11 debtor that such conduct will result in the designation or disqualification of their claims.

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 Seventh Circuit Court of Appeals’ recent decision in Illinois Department of Revenue v. Hanmi Bank challenges the prevailing view that as a matter of law an underwater senior creditor always could retain the entire proceeds of a free-and-clear sale with junior creditors receiving nothing. The Seventh Circuit’s decision may allow junior creditors in future bankruptcy cases a recovery based on the theory that a free and clear sale under § 363 of the Bankruptcy Code (Title 11) creates a premium for those assets that a junior creditor may potentially be entitled to share.

A sale under § 363 of the U.S. Bankruptcy Code (Title 11) allows the sale of assets through an auction and enables debtors with no desire to reorganize an opportunity to obtain the best possible return on their assets. While Hanmi deals with a state taxing authority and its particular rights under Illinois state law, nothing in the Seventh Circuit opinion limits its holding to the facts or to a specific type of creditor.

The court reasoned that a free-and-clear sale inherently creates a premium in value since it eliminates junior interests that otherwise may be difficult to eliminate. Some portion of the sale proceeds should be allocated to the eliminated junior interest, rather than going entirely to the underwater senior creditor. Although The court ultimately held in favor of the senior secured lenders on the evidence presented finding a failure of proof by the junior creditors of the value of the interest they would theoretically lose in the sale, the court’s reasoning opens the door to future bankruptcy cases where junior creditors may potentially receive a share of the sale proceeds.

The decision may allow junior creditors in future bankruptcy cases significant, and unprecedented, leverage to convince senior creditors into agreeing to share some of the proceeds of a free-and-clear sale, or otherwise submit to a contested evidentiary hearing regarding either the value of the interest lost by the junior creditors or the amount of the premium paid by the sale purchaser based on the enhanced protection of a free-and-clear sale because of the eliminated junior interests.

It is possible that other courts could narrowly regard the opinion and only apply it in circumstances where a junior creditor holds a successor liability claim against the purchaser at the sale personally rather than any claim against the selling debtor. The Seventh Circuit speculated that the purchasers at the sale may have paid a premium specifically to be insulated from any successor liability, and it is possible that a court would find no existing premium

While not all of the effects of this decision may be apparent, the possibility exists that increased delays may arise from the necessity to negotiate these sales with obstinate or defiant junior creditors. The decision also makes § 363 sales costlier and more unpredictable as it extends the life of the bankruptcy case and potentially reduces the recoveries of other creditor classes.

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.

As reported here recently, SB 1235 has been signed into law by Governor Brown. The legislature believes this new law will protect small business owners and empower more small businesses to succeed. Many of the bill’s supporters, including small business owners, believe the passing of this bill was critical not only to the economic health of California but to the entire nation as California becomes the first state to enact truth-in-lending laws that protect small business owners.

Small business lending is quickly evolving, primarily as a result of the internet giving small business lenders a means to find financing for their business enterprise in many novel ways and in many new places. Online there is a proliferation of lenders offering to provide easy to obtain next-day financing. Up to the passing of SB 1235, this type of lending was relatively unregulated.

Proponents of the bill, state that research, including that conducted by the U.S. Federal Reserve Bank, indicates that many business owners do not understand the true costs of business financing.  They claim that many small business owners felt that lending predators often took advantage of their ignorance. With the explosion of available lenders on the internet, more opportunities arose for the unscrupulous to unfairly profit at the expense of small business owners.

While most lenders that deal with small business owners are honest and transparent, there are always those that rely on high-pressure sales tactics and marketing strategies that often muddy the true cost of their product.  The legislature believes that SB 1235 will eliminate those practices that are unscrupulously confusing and compel those lenders who tend to act “on the fringe” to comply with basic disclosure requirements that ensure their honesty.

SB 1235 is seen by some as an opportunity for California to lead the country in providing small business owners with the same protections that consumers have enjoyed since the 1960s.  Proponents believe that any assistance to California’s 3.8 million small businesses should theoretically have a material, positive impact on the state’s economy as many of the bill’s advocates believe the new legislation will accomplish the unthinkable: The chance to provide an impetus for business growth with virtually no fiscal effect on Californians.

Senate Bill 1235 requires that a lender will have to disclose certain facts at the time it offers financing of less than $500,000 to a business owner. These factual disclosures include the total amount of financing; the total cost of financing; the length of the loan term; the frequency and amount of payments; any pre-payment policies; and the annualized rate of interest. The law applies to traditional term loans, lines of credit, merchant cash advances, lease financing, factoring, and asset-based financing.

With these material disclosures, some small business owners feel that they can make better decisions that have less of a tendency to negatively affect their business in the future. They feel that all of SB 1235’s required disclosures are sufficient to enable them to intelligently shop for financing and obtain the best loan deal possible. To a small business owner, fewer bad loans means fewer chances for a small business to economically move backward rather than forward. Perhaps more importantly, fewer bad loans may mean a lower likelihood that the business will ultimately fail. How SB 1235 affects small business owners truly remains to be seen. Only time will tell.

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.

Under legislation signed September 30, 2018, by Governor Brown, California will become the first jurisdiction in the United States to provide small business owners with the same protections that Truth-in-Lending laws have provided consumers for more than fifty years.

Senate Bill 1235, introduced and sponsored by Senator Steve Glazer, D-Orinda, will require lenders to provide certain disclosures with specificity, clarity, and consistency to small business owners at those instances that they offer them financing and close a transaction.

Glazer’s bill, which passed both houses of the Legislature with large, bipartisan majority votes, was modeled after recommendations from the Conference of State Bank Supervisors’ advisory panel on lending by financial technology (“FinTech”) firms. SB 1235 was supported by a broad coalition that included lenders, small business groups and advocates for policies that promote economic opportunity for all. The vote was 72-3 in the Assembly and 28-6 in the Senate.

SB 1235 addresses and remedies a growing problem in the small business finance market, which is quickly evolving and chiefly unregulated as online financing firms that offer innovative lending alternatives are replacing traditional lenders like banks.

In commenting about the law’s purpose and effect, Glazer stated “I applaud this new online lending industry because it is bringing capital to people who need it badly. “This law offers a modest measure – disclosure — to help level the playing field for small business owners. It will make California a leader in placing the interests of small business owners on par with the big players in the financial industry.”

Until the enactment of SB 1235, federal and state truth-in-lending and disclosure laws have applied only to consumer borrowers and loans. The prevailing attitude was that even the owners of the smallest business enterprises were sufficiently sophisticated to understand the dealings of the business world.

Today, this “presumption” of sophistication no longer holds true as studies by the U.S. Federal Reserve Bank and others have found that many entrepreneurs simply have very little knowledge of the finance industry. The result is that a problematic situation arises where small business owners “overborrow” and lenders are challenged to assist them in providing some remedy.

With the enactment of SB 1235, a lender will have to disclose certain facts at the time it offers financing of less than $500,000 to a business owner. These factual disclosures include:

• The total amount of financing;
• The total cost of financing;
• The length of the loan term;
• The frequency and amount of payments;
• Any pre-payment policies; and
• The annualized rate of interest.

The law applies to traditional term loans, lines of credit, merchant cash advances, lease financing, factoring, and asset-based financing. SB 1235 applies to online enterprises that act in partnership with banks to market and underwrite any financing ultimately made by a banking institution.

Regulations will be promulgated and adopted by the Department of Business Oversight to implement the law. These rules should provide guidance to lenders on the exact information necessary to be disclosed to comply with California law. While the law takes effect January 1, 2019, disclosures as required will not begin until after the DBO performs this function and completes the disclosure requirement formula.

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.