Glass & Goldberg | Financing, Property & Bankruptcy Law

A new bill, SB 1235 (Steve Glazer, D-Sacramento), has been introduced in the California State Senate that would require disclosure of interest rates, as well impose other regulations, for commercial loans. Currently, interest rate disclosures have never been required for commercial loans. If passed, this bill would surely have significant effects on the commercial lending industry in California. Legal observers expect many trade groups to lobby against the bill in its present form.

The bill applies to Licensed California Financial Lenders, and thus some lenders may be exempt from its requirements. Also, it only applies to certain commercial financing loans, which are A/R financing over $5,000, cash advances of $5,000 or more, or a line of credit of $5,000 or more.

SB 1235 mandates a “Reg. Z” type disclosure of interest rates, which is part of all consumer installment contracts. If passed, SB 1235 would make California the first state to require Reg. Z disclosure for commercial loans.

The bill requires lenders to specify the term of the loan and repayment policies, primarily ACH disclosures regarding the latter, and any prepayment options and penalties. Finally, the disclosure language may not cause borrower confusion, must be in at least 10 point type and be in the language used to negotiate the loan. The borrower must initial each of these statements.

According to the Legislative Counsel’s Digest:

This bill would require any person who engages in the business of commercial financing to, at the time of offering the commercial financing, provide to the prospective borrower a written statement showing in clear and distinct terms specified information regarding that transaction, including the total amount of fees, the amount provided, the APR related to that transaction, and policies regarding repayment or prepayment that apply to that transaction.

The bill would require that disclosure to be signed by all parties to the transaction and to meet certain requirements, such as that it must be in writing using a specified font size, made in the same language used in discussions or negotiations related to that transaction, and not be vague or misleading. The bill would define the term “commercial financing” for these purposes to mean a commercial loan, accounts receivable financing or factoring, a cash advance to a business, or a line of credit. By expanding the scope of an existing crime with respect to willful violations of the CFL, this bill would impose a state-mandated local program.

Some critics point out that for many short-term, working capital loans, the calculation of payments requires a daily ACH analysis. Thus, the bill may cause substantial systemic problems for commercial lenders, who would have to make the necessary calculations and provide notice.

Stay tuned for more on this as legislation in future blogs!

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 8, 2018, Senators John Cornyn (R-TX) and Elizabeth Warren (D-MA) introduced a bill (S. 2282) that would alter where corporate debtors file Chapter 11 bankruptcy cases. A large number of lawyers, judges, and professors throughout the country have actively worked on the issue of venue reform since 2011. The legislation aims to increase some fairness and convenience to those that regularly deal with the corporation such as creditors and even employees.

The bill shifts the distribution of Chapter 11 bankruptcy cases throughout the country’s federal districts. If passed, the resulting revisions to the federal statute affecting venue of bankruptcy cases would eliminate the state of incorporation for commencing a bankruptcy case and require corporate debtors to file in the district where their principal place of business or principal assets are located.

An abundance of both publicly traded companies and private companies have filed Chapter 11 bankruptcy cases in Delaware and New York-based either upon domicile or the claim of some minimal business operations “connected” to both jurisdictions. Recent data indicates that 70% of the public companies that filed Chapter 11 cases in the last five years filed in districts other than where its’ principal place of business or principal assets were located, and 80% of these cases were filed in either Delaware or the Southern District of New York. Is this what Congress intended?

Prior to 1987, corporations filed where the debtor had its principal place of business or principal assets for the preceding six months. Many bankruptcy scholars and professionals believe that Congress did not intend to change this result when it enacted the Bankruptcy Code in 1987.

Nonetheless, since 1987, courts have interpreted the term “domicile” to mean a company’s state of incorporation, thus allowing a corporate debtor to file in a location other than where its principal place of business or principal assets are located. Many have asked whether this result is necessarily fair to creditors, employees, and the local community where the business primarily operates.

The law as it currently stands allows potential corporate debtors to distance themselves from creditors and “forum shop” for jurisdictions that may render the most favorable rulings as to terms regarding the settlement of claims and reorganization of debt payment. Again, is this what Congress intended?

Stay tuned for more on this important bill in future blogs!

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 security interest provides lenders with the promise of repayment if a borrower defaults on a loan. In this instance, the lender may recover the amount of the loan by seizing and selling the asset used as the loan’s underlying collateral. Perfection is an important component of a secured transaction and in many cases achieved by the filing of financing statements with the California Secretary of State.

Lenders as secured parties must file their UCC-1 Financing Statement expediently and accurately to properly perfect their security interest in loan collateral. If a financing statement is incomplete, inaccurate, or untimely filed, it may remove a lender from a position of relative priority and allow secondary parties to claim a priority position. Here are some more common mistakes that secured parties make when filing financing statements:

*Failing to review acknowledgment copy

Much too often a filing party will fail to review the filing office’s acknowledgment of the filing of the financing statement. A careful review of the acknowledgment may identify problems sooner than later allowing the lender to easily fix them at the time of discovery.

*Failing to file promptly

Delays in filing financing statements may prove costly as the failure to perfect may cause an interest to be treated as a general unsecured debt in bankruptcy. For example, an involuntary bankruptcy petition filed during the short period between the advancement of funds and filing of the financing statement left secured parties unperfected. In Re: Millivision, Inc., 2007 U.S. App. LEXIS 873 (1^st. Cir. January 16, 2007).

*Failing to file at the correct location

UCCs are typically filed based on the location of debtor rather than the location of the collateral. If the debtor is a registered business, the financing statement is filed in the debtor’s home or domicile state. If the debtor is an unregistered business, it’s filed in the state where the debtor’s chief executive officer is located. For individuals, it is filed in their state of residence.

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.

Lenders as secured parties must file their UCC-1 Financing Statement expediently and accurately to properly perfect their security interest in loan collateral. If a financing statement is incomplete, inaccurate, or untimely filed, it may remove a lender from a position of relative priority and allow secondary parties to claim a priority position.

UCC-1 Financing Statements are utilized to effectively give third parties initial notice of the filing party’s interest in collateral. UCC-3 Financing Statements are utilized to terminate, continue, amend, or assign an interest identified under an already filed UCC-1. While a financing statement neither creates a lien or any additional rights against the secured party, it provides notice to the “world” that the filing party has rights in the collateral. Here are some common mistakes that secured parties make when filing financing statements:

*Failing to use the exact legal name

A UCC-1 Financing Statement must properly identify the debtor to effectively perfect a security interest. It is important that the debtor’s true and correct legal name is used on the UCC-1 Financing Statement. Because the essence of a business is contained in its documents of organization such as a partnership agreement or articles of incorporation, the name of a business as listed on these documents should identically match the name of the business as listed on the financing statement.

A common mistake related to non-individual debtors is to use the name of the business entity as listed in the records of the Secretary of State. A common mistake of individual debtors is to use a nickname or shortened version of a name on the financing statement. There has been a minimum of six reported cases where the financing statement listed the name of the debtor as “Mike” instead of “Michael.” All of the Mikes lost in each instance.

*Using the “dba” designation as part of the debtor’s name

There are many cases where a secured party includes a “dba” name to more clearly identify the debtor. Of course, while this comes with good intentions, it ignores the requirement of filing a financing statement that lists the exact legal name of a debtor. In the alternative, it would probably be wiser to omit the “dba” tag and list the alternate as a trade name under “additional debtor.”

*Failing to attach external documentation

Any reference to an external document is insufficient unless the financing statement has a copy of the referenced document attached. A Financing Statement that requires attachment pages to list specific collateral must not be deficient or the security interest may be unperfected. Missing attachment s may cause a financing statement to inadequately describe the collateral, which may cause a loss of priority position in the event of a competing interest.

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.

Lenders use UCC Financing Statements to effectively give other parties notice of their security interest in collateral. While a financing statement neither creates a lien or any additional rights against the secured party, it provides notice to the “world” that the filing party has rights in the collateral.

Not only must lenders as secured parties file their financing statements expediently, they must file financing statements that are accurate. If a financing statement is incomplete, inaccurate, or untimely filed, it may remove a lender from a position of relative priority and allow secondary parties to claim a position of higher priority.

California law states that a financing statement substantially satisfies California legal requirements even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading. Also, the actual notice of or discovery of the financing statement and purported security interest does not give validity to a financing statement that is “seriously misleading.” If seriously misleading but discoverable by search logic other than that of the filing office or using filing office search logic to search a database other than the filing office, the financing statement is nevertheless ineffective.

A financing statement that fails sufficiently to provide the name of the debtor in accordance with California law is seriously misleading. If the debtor is a registered organization or the collateral is held in a trust that is a registered organization, the financing statement must provide the name that is stated to be the registered organization’s name on the public organic record most recently filed with or issued or enacted by the registered organization’s jurisdiction of organization which purports to state, amend, or restate the registered organization’s name.

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.

At the closing of a personal property secured transaction, legal counsel for the borrower often delivers an opinion to the lender concerning the security interests in the borrower’s personal property the borrower has granted to the lender. At the time, the parties typically consider whether a Security Interest Opinion is necessary and, if so, the professional best able to render such an opinion. There are various considerations in making this assessment.

First, an attorney should not request an opinion that he or she would be unwilling to state. Second, a lawyer should not request an opinion in an area of substantial legal uncertainty. Third, a lawyer should not request an opinion if the delivery of the opinion is unreasonably costly based on the size of the transaction and the relative benefit provided by the opinion, especially if the opinion will be subject to extensive qualifications and exceptions.

Parties to secured transactions like lenders and their legal representatives must act reasonably in assessing whether there is a necessity or even reasonable justification for a Security Interest Opinion. This is especially true today based on the increased ease in which perfection may occur and the greater uniformity in personal property secured transactions law as a result of revised Article 9’s almost uniform adoption throughout the United States.

It is currently a common practice based on reasons mostly related to efficiency for the debtor’s lawyer to provide a Security Interest Opinion at the closing of the transaction. There are exceptions which may necessitate the consideration of whether the secured party’s lawyer is in a better position to provide the Security Interest Opinion.

A Security Interest Opinion does not address choice-of-law issues unless expressly addressed in the opinion, and, as a result, does not address which state’s law governs perfection, as well as the effect of perfection or nonperfection or the priority of any security interest. If the law of some other jurisdiction may apply to the transaction, it may be necessary to obtain legal counsel in this other jurisdiction to give or supplement the Security Interest Opinion.

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.

All states have implemented the federal Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) originally enacted by Congress in 2008. Along with California, the states have adopted state “SAFE” Acts based on model law.

The SAFE Act requires individuals “engaging in the business of loan originator” to satisfy requirements related to education, licensing, registration, and background checks. The SAFE Act directed the states to establish licensing and registration systems that meet federal requirements.

As a response to the federal SAFE Act, beginning July 1, 2010, California Senate Bill 36 went into effect that required the employees of licensees under the California Finance Lenders Law (CFLL) and the California Residential Mortgage Lending Act (RMLA) engaged in the business of mortgage loan origination to be licensed.

Mortgage loan originator license and endorsement applicants are required to submit to fingerprinting for a criminal history background check; complete a minimum of twenty hours of pre-license education, and pass a qualified written test developed by the Nationwide Mortgage Licensing System (NMLS).

Pursuant to SB 36, licensed mortgage loan originators must complete at least eight hours of continuing education annually and must disclose their NMLS identifier on all residential mortgage loan application forms, solicitations, and advertisements. Also, REL licensees are required to submit an annual business activities report to the Commissioner of the California Department of Real Estate.

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.

Reducing a working arrangement to writing is always wise for the obvious reasons. In many cases, the law simply requires it. In California, lenders licensed under the Residential Mortgage Lending Act may not engage in brokerage services without providing a loan brokerage agreement that must be offered to the borrower “as soon as practical” after a borrower requests a loan from another institutional lender.

A loan brokerage agreement must include the following provisions:

• The unique identifier of the mortgage loan originator who signs the loan brokerage agreement;
• An explicit statement that the licensee is acting as the agent of the borrower and that, therefore, the licensee owes a fiduciary duty to the borrower as his or her agent;
• A detailed description of the services to be provided by the licensee on behalf of the borrower;
• A good faith estimate of the fees for the services to be rendered; and
• A clear and conspicuous statement of the conditions under which the borrower is obligated to pay the licensee for the services to be rendered.

The agreement must also include a statement advising the borrower that, if the licensee makes a false or misleading statement or an omission in implementing the agreement, the borrower has the right to:

• Rescind the brokerage agreement;
• Recover fees paid by the borrower to the licensee; and
• Recover actual costs, including attorney’s fees, incurred by the borrower in enforcing his/her rights under the brokerage agreement.

If the loan brokerage agreement fails to set forth the above rights, they are nonetheless implied by operation of law.

A loan brokerage agreement must include both the signature of the borrower and licensed loan originator representing the licensed mortgage lender. The borrower must receive a copy of the fully-executed agreement within three business days after the agreement ‘is executed. There are also specific requirements regarding loan brokerage agreements that provide for the collection of an application fee. These agreements must be approved by the Commissioner of the Department of Real Estate.

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 all likelihood, California has the most complex licensing system for mortgage professionals in the United States. Rules and regulations regarding licensing are set forth in two different state laws: the California Finance Lenders Law, now called, “California Financing Law” effective October 4, 2017 (CFL) and the California Residential Mortgage Lending Act (CRMLA).

Both pieces of legislation were enacted by the California State Legislature in 1994. The CRMLA applies to non-depository lenders and loan servicers, as well as their employees who act as mortgage loan originators. The CFL regulates the lending activities of finance lenders and brokers and applies to all who make commercial loans and consumer loans.

The CFL covers licensing requirements and exemptions thereto; provisions concerning license revocation or suspension; and penalties for violations of both consumer and commercial lending requirements. The California Financing Law lists the following as its purposes:

• To simplify, clarify, and modernize the law governing loans made by finance lenders;
• To ensure an adequate supply of credit to borrowers in the state of California;
• To protect borrowers against unfair practices;
• To foster competition among finance lenders;
• To permit and encourage the development of fair and economically-sound lending practices; and
• To encourage and foster a sound economic climate in the state of California.

Some of the relevant definitions found in the CFL illustrating its coverage and applicability include broker, finance lender, mortgage loan originator, finance company, and residential mortgage loan. Relevant definitions found in the CRMLA illustrating its coverage and applicability include annual audit, institutional investor, lender, loan processor or originator, mortgage loan originator, registered mortgage loan originator, and mortgage servicer. Understanding how both of the laws operate in tandem is truly challenging and complicated.

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.