All items from Tough Times for Lenders

It is said that when the debtor files bankruptcy the debtor is in a fish bowl.  The reason is simple:  the debtor in bankruptcy is required to make honest and sworn disclosure of all manner of financial and operational information on request and at regular intervals per the bankruptcy code.  Often, new and exciting liabilities and obligations are discovered by the lenders when their borrower files bankruptcy.  The policy behind this is obvious.  Moreover, rarely does a debtor find itself in bankruptcy because it was too honest.  However, sometimes this statutory preference for sharing collides with the real need to keep trade secrets, secret.
Apple Fish Bowl
Many of you probably heard of the Apple, Inc. vendor who filed bankruptcy.  The vendor, who is GT Advanced Technologies, Inc. and affiliates, made the screens for Apple phones.  The bankruptcy filing made the news because of the stunning possibility that anything related to Apple could be in financial peril.
The screens are technically difficult to make, but Apple sold over 10 million IPhone 6 phones in the first week.  Compare that to reports of Amazon Fire Phone sales of 34 thousand after two weeks.



Posted 1 week 4 days ago

Between 2005 and 2007, Wells Fargo made a paltry $1.4 billion in overdraft fees.  However, a California Federal Court found that those fees were a result of misleading practices and ordered Wells Fargo pay $203 million in restitution.  The award was recently affirmed by the Federal Appeals Court in the Ninth Circuit.  Gutierrez v. Wells Fargo, 2014 WL 5462407.
Overdraft fees put clients in dire straightsOverdraft fees put clients in dire straights
At the heart of the issue in the Gutierrez case was Wells Fargo’s practice of posting debits at the end of the day “high-to-low”; meaning, the largest debit was posted first and sequentially less debits were posted after in order of decreasing amount.  The alternative methods identified by the Court would have been “low-to-high” and “chronological”.



Posted 2 weeks 3 days ago

I always assume that people who like NASCAR are really watching for the wrecks.  The cars loop around the track for hours, but only the wrecks make the highlight reels.  In a recent Texas Supreme Court case, the high court considered whether a supermarket was liable for destruction of evidence when it retained only the video recorded around the time of a slip and fall after its looped camera system deleted the rest.
shake and bake
The case is Brookshire Brothers Ltd. v. Aldridge at the Texas Supreme Court (for those of you outside of Texas, Brookshire Brothers is a supermarket).
In the Brookshire case, a slip and fall claim made it to the SCOTX because Brookshire had allowed a security camera (on a loop) to record over all but a few minutes before and after of the actual fall.  At the heart of Brookshire’s reasoning for recording over the video was the risk manager’s mistaken belief that the time prior to the fall was “not relevant”.
Even folks not familiar with the law have a general concept that destroying evidence is a bad thing.  The question in practical terms in a real lawsuit is – what is “evidence”.  At the heart of that question is relevance to the dispute.  That concept fills volumes of scholarly papers.  I won’t go into it here.



Posted 3 weeks 2 days ago

In meetings with senior executives and their in-house counsel, I hear this consistent cry: due to ever-increasing regulations, costs associated with compliance are soaring at commercial banks and at financial institutions that own banks (such as life insurance companies).  As a result, “regulatory cost collaboration” is becoming a key strategy for financial institutions with their key vendors.  It is a strategy that overlooks a very familiar and expense vendor: lawyers.
 
Puzzle missing legal
This omission will not last for long.
The impact of compliance costs is well documented (look at this report by Thomson Reuters; and this survey of small banks by Hester Peirce, Ian Robinson and Thomas Stratmann at the Mercatus Center [George Mason University]).
It is a story that I hear 100% of the time from senior executives.  Here are two examples:



Posted 3 weeks 4 days ago

I have found this to be true over and over again.  Maybe it’s just my line of work.
Grump Cat
Part of my regular practice is being called in by the transactional lawyers (paper pushers) as they paper up a new loan or re-fi.  My job in those situations is to give my thoughts on what will happen should the worst occur (eg, default, receivership, bankruptcy, lawsuit, etc.) and how to minimize the risks to the lender.
Often times, identifying potential fraudulent transfer exposure on the front end is of concern when the lender creates some type of relationship with a non-borrower affiliate or insider of the borrower. The usual situation is a guarantor, but other situations exist such as payment from a non-borrower affiliate.  A recent 5th Circuit case discusses such a situation.
The Background – Skip this if you are Familiar with Fraudulent Transfers
There are a few types of “fraudulent transfers” under both federal and state law.  Generally speaking, however, a fraudulent transfer occurs in two ways:



Posted 4 weeks 2 days ago

I’m back. Back to blogging. Home here at L360.
The Return of the Prodigal Son Painting by Bartholome Esteban Murillo National Gallery of Art (Washington, D.C.) The Return of the Prodigal Son
Painting by Bartholome Esteban Murillo
National Gallery of Art (Washington, D.C.)
Several years ago, Kevin O’Keefe or Tom Mighell (one of them) commented that the majority of legal blogs last less than a year. Clearly, I’m one of them on quiting. It just took me longer to quit.
I stopped regularly blogging after 4 years (from September, 2008 until October 2012), and after over 420 blog entries. Always focusing on commercial finance, I started blogging on distressed debt topics (under the “ToughTimesForLenders” blog name).  As the economy (kind of) recovered, the blog became “Lenders360blog” in order to cover “positive” finance topics. Finally, technology was added since it is an operational pillar for all commercial lenders.



Posted 5 weeks 1 day ago

Last week Regions Bank sued Comerica Bank seeking a declaration that Regions is not liable to Comerica in connection with their $53MM syndicate loan to a plant nursery that went very wrong.  Regions Bank v. Comerica Bank, civil action 3:14-cv-3607, pending in the United States District Court for the Northern District of Texas.
In short:

  • The two banks loaned $53MM (total) to the plant nursery based on allegedly massively fraudulent inventory numbers.
  • The nursery filed bankruptcy and basically everyone apparently got sued for the alleged fraud.
  • Comerica allegedly has been threatening Regions with a lawsuit for misrepresentation or fraud for talking them into the syndicate.
  • Rather than wait for the lawsuit, Regions filed its declaratory judgment action.
  • In the lawsuit, Regions asserts that Comerica contractually waived any reliance on facts or representations that Regions provided to Comerica.  Thus, argues Regions, Regions cannot be liable to Comerica on account of Comerica relying on any information Regions forwarded to Comerica about the borrower.

There are a number of issues related to the lawsuit that are worthy of analysis.  (There are also a number of one-liners about money not growing on trees).  However, as the case is only a week old it provides a good avenue to illustrate the two levels of reliance waivers in Texas.



Posted 5 weeks 4 days ago

If you’re the bank’s attorney, the answer is always going to be the Cayman Islands.  Nothing against Odessa, they just don’t have much of a beach.
But, if you are the bank, chances are you would rather be local if you need to sue.  In the recent Fifth Circuit case Monkton Insurance Services v. Ritter, case 13-50941, the Fifth Circuit agreed with Cayman Island bank Butterfield Bank (Cayman) Ltd. that a lawsuit against the bank needed to be filed in the islands.
In the Monkton case, William Ritter formed a Cayman Island insurance company which was managed by the Cayman Island management company, Monkton.  David Self was the Monkton employee that was in charge of managing the insurance company.  Presumably, the insurance company was conducting legitimate business and performing reasonably well, because it had about $500K in its Butterfield Bank account which Self, allegedly, made off with.
Allegedly, Self forged Ritter’s signatures.  Ritter was somewhat upset and demanded repayment, which Self paid by (again, allegedly) simply taking funds from other clients’ accounts.  Lawsuits ensued.
Whereas Ritter lived in Odessa, Texas, Monkton sued Ritter for return of the cash that Self had paid to Ritter personally.  Ritter then filed a third-party lawsuit against Butterfield Bank in Odessa (as part of the Monkton lawsuit).  Basically, Ritter was claiming lender liability for failure to spot the forged withdrawal documents.



Posted 6 weeks 4 days ago

Believe it or not, when you (the good guy) accidently produce in discovery an internal memo which is subject to attorney-client privilege to the bad guys (the guys suing you), the bad guys might not give back all the copies.  And, if you are really unlucky, the bad guys will distribute it to other bad guys also suing you for similar reasons.  You might even litigate the issue to the Fifth Circuit court of appeals and win, but the cat will be out of the bag.
In the Fifth Circuit case Exxon Mobil v. Hill, No. 13-30830 the Court held that an internal memo discussing the radioactivity of material (and its harm) was subject to attorney-client privilege. The Court held that the nature of its creation precluded the need to provide the memo in discovery (even though people got very sick from the radiation).  However, the cautionary tale is that even though the plaintiff returned a copy, he did not return all copies of the memo that was accidently shared.  What ensured was years of litigation.
At the center of the case is a memo drafted by Exxon’s in-house counsel concerning whether to provide radioactivity test results (related to drilling pipe) to a potential contractual counter party who was offering to clean the drilling pipe as a contractor.  In the memo, the in-house counsel opines that Exxon should only provide the information specifically requested by the contractor and that Exxon would not provide the additional information which showed a significantly higher level or radioactivity.



Posted 6 weeks 4 days ago

Over the last few weeks, I’ve commented on the new version of the OCC’s Commercial Real Estate Lending Handbook (I give it a gentlemen’s C); and I listed a few legal topics that deserve some guidance from the OCC.
“Guidance” could even merely be a list of important topics (ending with a warning that the list is NOT an all-inclusive list).
I expect legal issues to be identified and put on the “check the box” list by the OCC  - with the banks expect to check the box.
The "Blank" List
 
Unfortunately, instead of leading the class by at least listing legal issues associated with risks in commercial real estate lending, the OCC implicitly affirms those banks that under value and under utilize legal counsel.  (Let’s resist the temptation to comment on “why” this takes place.)
Fortunately, some banks are very good at identifying and monitoring legal issues. Several of them do this by a simple two step process:



Posted 1 year 5 weeks ago