Glass & Goldberg | Financing, Property & Bankruptcy Law

The normal course of events changes when a tenant chooses to assert its rights under the Bankruptcy Code. In this situation, commercial landlords must carefully proceed as they deal with a multitude of issues when tenants file for reorganization under the Bankruptcy Code.

Under § 365(d)(4) of the Bankruptcy Code, a debtor must assume or reject a lease within 120 days from the petition date, subject to one 90-day extension with court permission prior to the expiration of the 90-day period. All further extensions of this 210-day total period require the landlord’s prior written consent. Once a debtor rejects the lease, a landlord may file a claim for lease rejection damages for rent from the date that the bankruptcy case was filed through the lease termination date.

Specifically, a landlord may pursue claims under 11 U.S.C. §502(b)(6) for damages that result from the termination of the lease to the extent the claim exceeds the rent designated by the lease, without acceleration, for the greater of one year, or 15%, not to exceed three years, of the remaining lease term, following the earlier of the date of the filing of the bankruptcy petition and the date on which the landlord (lessor) repossessed or the tenant (lessee) surrendered the property, plus any unpaid rent due under such lease, without acceleration, on the earlier of these dates.

While this claim may include lost rent and other charges and costs incurred pursuant to the lease, federal bankruptcy law caps at the greater of one year of rent or 15% of the remaining term not to exceed three years. If the commercial property is leased to another party, the claim may be reduced to the landlord’s actual damages, subject to the federally-imposed cap.

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.

Federal bankruptcy law uses special rules to treat the situation where a commercial landlord is faced with a bankruptcy filing by a tenant. Bankruptcy law does not treat the filing of a bankruptcy petition by a tenant as a default entitling the landlord to terminate the lease agreement, despite the fact that the lease may contain an ipso facto clause providing such. Ipso facto clauses are void under Title 11 (the “Bankruptcy Code”). Thus, a commercial landlord must maximize its available remedies to minimize its losses.

One remedy available to a landlord is an administrative priority claim under 11 U.S.C. §503(b), which is based upon the value provided by the landlord to the tenant-debtor’s bankruptcy estate.

While a landlord is entitled to rent while the bankruptcy case is pending under § 365(d)(3), until the tenant rejects or assumes the lease, or surrenders and vacates the property, this rent is an administrative expense or priority claim under § 503(b)(1)(A). Often, tenant-debtors will continue to pay administrative rent while it considers whether or not to reject or assume the lease. If the debtor accepts or assumes the lease, it must continue paying administrative rent during the bankruptcy case.

For a landlord to be entitled to a claim under §503(b), the debtor’s possession and/or use of the subject property must provide value to the estate. The fair market value of the premises as used by the debtor rather than the rental value provided in the lease is the amount that the landlord may claim under §503(b). The lease may charge $40.00/square foot, but if the property is used only for storage purposes, the administrative priority value may be worth only the warehouse rental rate of $15.00/square foot.

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 Bankruptcy Code (Title 11) contains many special, mandatory provisions that deal with commercial leases. Because certain issues arise depending on whether or not the tenant decides to assert its rights under the Bankruptcy Code, commercial landlords must carefully proceed when dealing with tenant-debtors. Commercial landlords thus deal with a plethora of issues when their tenants file for protection under the federal bankruptcy laws.

One of the primary reasons for the confusion is that a commercial landlord has several non-exclusive remedies to address certain events. These remedies are dependent upon multiple variables, including whether the lease expired or was terminated prior to the filing of the bankruptcy petition, whether any defaults under the lease are cured, whether the debtor remains in possession of the property after the filing of the bankruptcy petition, and whether the debtor defaults under the lease post-petition.

Commercial landlords typically have pre-petition claims under 11 U.S.C. § 502(b)(6) for all sums due under the lease as of the date of the filing of the bankruptcy petition, including unpaid rent and charges such as common area maintenance charges (CAMs, CAM reconciliations).

Commercial landlords have two types of post-petition claims available: claims arising under 11 U.S.C. §365(d)(3) and claims arising under 11 U.S.C. §503(b). This blog will address the first type and a future blog will address the second type.

A landlord’s claims arising under §365(d)(3) include amounts due for post-petition rent and charges incurred from the petition date through the date that the debtor assumes or rejects the lease. Tenant-debtors are required to make post-petition, pre-rejection payments without court intervention as such payments become due pursuant to the lease’s terms.

A landlord may file a motion for relief from the automatic stay seeking to enforce its state-law remedies if the debtor fails to make these payments in a timely fashion post-petition. A landlord may also compel the debtor to make these payments by court order, as well as file an administrative priority claim for any post-petition rents as they become due.

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 PGA West Residential Association, Inc. v. Hulven International, Inc., 2017 S.O.S. 4035, plaintiffs alleged that a property owner attempted to insulate the equity in his property from creditors by fraudulent means, specifically, naming a sham corporation as the beneficiary on a deed of trust. The lawsuit was filed more than seven years after the alleged fraudulent activity.

Defendants argued that a transfer to a sham entity constituted a “transfer” under the Uniform Fraudulent Transfer Act (UFTA) and that the UFTA and its seven-year limitations period governed the alleged unlawful activity. PGA West argued that there was no “transfer” because Hulven never really existed and, as a result, was incapable of acting as a transferee and, therefore, the UFTA and its limitations period did not apply.

The court found that the defendant’s alleged fraudulent attempt constituted a “transfer” for purposes of the UFTA and that the seven-year limitations period applied. Further, the court found that the seven-year limitations period for actions under UFTA is a substantive statute of repose that completely extinguishes a right or obligation and is not subject to forfeiture. Because the plaintiff filed its lawsuit after the UFTA‟s statute of repose seven-year limitations period had expired, its rights under UFTA were completely extinguished.

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 Court of Appeals has held that a general release is ineffective to release usury claims. In Hardwick v. Wilcox, 11 Cal.App.5th 975 (2017), James Hardwick, received several loans at an interest rate of approximately 12% from Albert Wilcox. The latter was unlicensed as a lender and had no other exemption from usury under California law.

Wilcox foreclosed on the loans secured by deeds of trust on Hardwick’s commercial property and, upon Hardwick’s default, began foreclosure proceedings. The parties entered into a forbearance agreement which contained a general release of claims, including future unknown claims, permitted by California state law, known as an “1152 waiver.”

Nine months later, when Hardwick sued Wilcox to recover excess interest, the latter moved to dismiss the suit based on the general release of present and future claims. The release did not specifically mention usury claims. The trial court held that the general release was not made in anticipation of usury claims.  As a result, the trial court ruled that the release did not release usury claims and that even if it did, any such release would be against public policy and, therefore, invalid.

The California Court of Appeals affirmed the trial court’s judgment which gave over $200k to Hardwick for damages based on usurious interest. It held that the general release was ineffective to release usury claims since the forbearance agreement obligated Hardwick to make further payments, which were also usurious, and the release, therefore, violated public policy. Also, because there was no mention of usury nor any claim for usury contemplated or made at the time the release was executed, it was not a knowing and voluntary waiver of rights.

If a lender is making million dollar loans, it needs to be licensed or procure another type of exemption from usury. Otherwise, an alternative is to concede a discount below 10% on the interest rate to prevent a usury claim. Based on this case, the only other option may be to risk a legal action based on usurious 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.

In a recent case, the 9th Circuit allowed the sale of property ‘free and clear’ of tenant interests. The case decided in July, In re Spanish Peaks Holdings II, LLC, ruled that despite the tenant protections contained in § 365(h)of the Bankruptcy Code, a bankruptcy estate may sell property free and clear of leases. The court also ruled that tenants are entitled to “adequate protection” of their interests, as long as that they provide sufficient evidence and timely request it.

While the tenants in the Spanish Peaks argued that § 365(h) of Title 11 gave them the absolute right to remain at the property, they failed to both request adequate protection and provide evidence of the ensuing harm if they were forced to leave the property. As a result of these costly pleading omissions, the rental property was sold free and clear of their leases and the tenants received nothing to show for their losses.

In Spanish Peaks, the borrower owed the secured lender more than $122 million for a loan for a resort and casino in Montana. The underlying leases were inexpensive and involved insiders. The secured lender and the bankruptcy trustee stipulated that the property would be sold at auction for not less than $20 million, free and clear of all liens and interests.

The borrower objected to the sale arguing that § 365(h) of the Bankruptcy Code gave them the right to retain possession of the property. The Motion did not request adequate protection of their interests. After the property was sold for $26.1 million, the order approving the sale was ambiguous as to whether the property was sold free and clear of the leases. Motions for clarification of the sale order were then filed.

Pointing out that the lessees had not requested adequate protection for their leasehold interests prior to the sale, the bankruptcy court ruled that the sale was free and clear of the leases. In affirming the bankruptcy court’s decision, the district court held that the sale extinguished the leases because, under Montana law, the foreclosure of a mortgage would terminate any leasehold interest junior to the mortgage.

The lesson of Spanish Peaks for trustees and debtors-in-possession is that commercial leases should not be rejected unless the lessee is certain that the property will not be sold. Once rejected, tenants receive some rights as the provisions of 365(h) take effect.

The lesson of Spanish Peaks for trustees and debtors-in-possession is that rejection of a lease may actually secure their right to retain possession of the property if a later sale should occur. Also, if the lender files a motion to sell, tenants must actively and affirmatively request adequate protection providing evidence of any ensuing harm if forced to relocate from the subject property. Adequate protection would include the costs of moving and alternative rentals, as well as compensation for any disruption to the business.

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 qualitative assessment of a firm’s capital plan is based on an absolute assessment of an individual firm’s capital planning practices relative to the Federal Reserve’s expectations as set forth in SR letter 15-18 rather than comparative rankings. Thus, a low ranking is not, in and of itself, a reason for the Fed to object to a capital plan.

After a detailed and extensive review by the national committee, recommendations are formulated by various bodies.

• DSTs formulate a recommendation regarding whether to object to a firm’s capital plan based on the combined assessment;
• The LISCC’s Operating Committee comprised of senior staff from across the Federal Reserve System, reviews and presents its own recommendation for each LISCC firm to the director of the Board’s Division of Supervision and Regulation.
• Reserve Banks responsible for the supervision of large and complex firms that are not LISCC firms make recommendations with regard to those firms.

After review by a separate committee of senior staff, using supervisory findings, the director makes the final recommendations to the Board of Governors, which makes the final decision regarding whether to object to a firm’s capital plan.

Objections on qualitative grounds may arise for reasons including, but not limited to:

• unresolved material supervisory issues;
• unsuitable assumptions and analyses underlying a firm’s capital plan; or
• inadequate governance and internal controls, risk management and risk identification in support of a firm’s capital planning practices.

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.

Firms submit capital plans to the Federal Reserve each year in April. These capital plans include detailed descriptions of the firms’ capital planning practices. These include descriptions of their policies governing capital actions and their internal procedures for assessing capital adequacy. Federal Reserve experts expend three months conducting an analysis of these policies and processes. Information gathered by related supervisory work conducted through the year also contributes to the analyses.

Two groups of supervisors conduct an initial assessment of each firm’s capital plan submission. The first group consists of dedicated supervisory teams (DSTs), which are composed of Federal Reserve staff that focus on a single firm. The second group consists of horizontal evaluation teams (HETs) which are composed of Federal Reserve staff focus on the examination of practices across multiple firms rather than a specific financial institution.

After the initial assessment, the DSTs and HETs rate each firm’s practices in each of six areas:

1. governance
2. risk management
3. internal controls
4. capital policies
5. scenario design
6. projection methodologies

The ratings indicate the extent to which a firm’s capital planning practices meet previously communicated supervisory expectations. These ratings are further utilized to determine the nature and severity of supervisory feedback. Then, a committee of senior staff members reviews these initial supervisory assessments seeking to confirm that:

• evaluations are aligned with the supervisory expectations communicated to the industry;
• evaluations are well supported and are consistently applied across firms accounting for their size and complexity; and
• assessments, as reflected in the ratings, are appropriately calibrated to the materiality of the supervisory concern.

This committee also ranks firms based on the ratings for each assessment area, considering each firm’s individual risk profile. These rankings assist the Fed in distinguishing the relative strength of each firm’s capital planning practices and facilitating the consistent application of supervisory guidance across firms.

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.

Annually in April, firms submit capital plans to the Federal Reserve. These capital plans include detailed descriptions of the firms’ capital planning practices, including descriptions of their policies governing capital actions and their internal procedures for assessing capital adequacy. Federal Reserve experts expend three months conducting an analysis of these policies and processes. Information gathered by related supervisory work conducted through the year also contributes to the analysis.

Two groups of supervisors conduct an initial assessment of each firm’s capital plan submission. The first group consists of dedicated supervisory teams (DSTs), which are composed of Federal Reserve staff that focus on a single firm, assess the adequacy of firms’ capital planning practices related to governance, risk management, internal controls, and scenario design. The capital planning review team works closely with DSTs to provide a horizontal assessment across the DSTs’ areas of focus.

The second group consists of horizontal evaluation teams (HETs) which are composed of Federal Reserve staff focus on the examination of practices across multiple firms rather than a specific financial institution for purposes of the Comprehensive Capital Analysis and Review (CCAR) annual review and summary. Some HETs assess the reasonableness of firms’ stressed loss, revenue, and expense estimation approaches, as well as the firms’ underlying governance and control mechanisms for these approaches.

Both the assessments of the DST and HET, based on previously articulated supervisory guidance and expectations, consider whether a firm’s capital planning practices enable it to reliably estimate its capital needs looking forward, assuming dynamic changes that may occur to its risk profile. This horizontal review assists the Federal Reserve in consistently applying its supervisory expectations to its assessment of each firm’s capital planning practices.

Stay tuned for more in the next installment further detailing this process.

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.