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Business Law

V. Creditor and Borrower Liability

A.      Regulatory and Tort Claims – Good Faith, Fiduciary Duties, Interference With Prospective Economic Advantage, Libel, Invasion of Privacy

Roy Allan Slurry Seal v. American Asphalt South, _ Cal.5th _ (2017) – For a plaintiff to state a cause of action for intentional interference with prospective economic advantage, the plaintiff must allege that it had a preexisting economic relationship with a third party with probable future benefit that preceded or existed separately from defendant’s interference. In the particular case of a public works contract, where the governmental entity has very broad discretion to reject bids, an “existing” relationship does not exist sufficient to support the claim because the prospective economic benefit is too “speculative” and “attenuated.”

–  Honeycutt v. United States, _ U.S. _ (2017) – The members of a criminal conspiracy do not have “joint and several liability” for forfeiture among the members of the criminal conspiracy, unless the individual conspirator “acquired” or “personally benefit[ed]” from the forfeitable property.

Ascentium Capital LLC v. Adams Tank & Lift Inc., 2017 WL 4102741 (M.D. Ga. 2017) – The lender expecting to obtain a PMSI in equipment and which advanced funds directly to the debtor’s seller had a cause of action against the seller for money had and received – but not for unjust enrichment – for not returning the portion of the funds allocated to equipment that the debtor never purchased, and instead forwarding those funds to the debtor.

Transit Funding Associates, LLC v. Capital One Equipment Finance Corp., 48 N.Y.S.3d 110 (N.Y. App. Div. 2017) – Because a loan agreement expressly provided that the lender could deny any funding request “in its sole and absolute discretion,” the borrower had no claim against the lender for breach of contract or breach of the duty of good faith arising from the lender’s refusal to make requested advances, even though the refusal might have put the
borrower out of business and might have been motivated by the lender’s relationship with a competitor of the borrower.*

Bank of America v. JB Hanna, LLC, 866 F.3d 929 (8th Cir. 2017) – A sophisticated borrower which had experience with loan agreements and interest-rate swaps could not have reasonably relied on the lender’s allegedly fraudulent representation that a new five-year loan agreement coupled with an interest-rate swap of mismatched duration was in the borrower’s best interest.

Rebel Auction Co., Inc. v. Citizens Bank, 805 S.E.2d 913 (Ga. Ct. App. 2017) – A bank claiming a security interest in equipment was not entitled to summary judgment on its claim for conversion against the auctioneer that admitted (apparently mistakenly) to selling the equipment because the bank’s filed financing statement identified the debtor as “Big Metal Construction Inc. Payroll Account” instead of “Big Metal Construction Inc.,” and neither party had submitted evidence about whether the financing statement would have been disclosed in response to a search under the debtor’s correct name. Hence a material fact remained in dispute about whether the equipment was encumbered by the financing statement.

DS-Concept Trade Invest, LLC v. Morgan-Todt, Inc., 2017 WL 2180982 (N.D. Cal. 2017) – The factor that purchased the accounts of a cheese supplier might have a negligence claim against the storage company that improperly stored the cheese in a freezer, rather than a refrigerator, rendering the cheese unfit for consumption. The factor claimed to have a security interest in the cheese and the storage company might have had a duty to the factor because the factor alleged that pursuant to practice within the global industry pertaining to trade debt and factoring agreements, the storage company should have understood that the cheese and its proceeds were subject to third-party interests “in favor of those who had provided financing in connection with the acquisition and intended sale of the cheese.”

Commercial Credit Group, Inc. v. Process, Inc., 2017 WL 4214085 (E.D. Ark. 2017) – A buyer of collateralized equipment was estopped from alleging that the security interest was unperfected or that the buyer took free as a buyer in ordinary course of business by statements made in the buyer’s pleadings. The buyer also failed to show that no portion of the secured obligation remained outstanding after the secured party purchased the proceeds of the equipment using a credit bid.

Wilhelm Management, LLC v. MB Financial Bank, 2017 WL 1333599 (Ill. Ct. App. 2017) – The trial court did not err in granting a judgment notwithstanding the verdict after a jury found a bank liable for inducing an assignee for the benefit of creditors to breach his fiduciary duties. The bank had a perfected security interest in all of the assignor’s assets, did nothing wrong in conferring with the assignor, and was within its rights in refusing to consent to an offer to buy the assets conditioned on a release of the guarantors. Moreover, the assignor did not breach his fiduciary duties because he advertised the assets for sale and he received no offers for an amount in excess of what was owed to the bank.*

B.  Obligations Under Corporate and Securities Laws

Marblegate Asset Management, LLC v. Education Management Finance Corp., _ F.3d _ (2d Cir. 2017) – Trust Indenture Act of 1939 § 316(b) prohibits only non‐consensual amendments to an indenture’s core payment terms. In addition, the court indicated that successor liability and fraudulent transfer theories could apply to a UCC foreclosure sale.

Frechter v. Zier, 2017 WL _ (Del. Ch. 2017) – A bylaw provision that allowed the removal of directors of a Delaware corporation only by a two-thirds vote was “inconsistent” with Delaware GCL § 141(k), which provides that a director “may” be removed by a majority vote.

Western Surety Company v. La Cumbre Office Partners, LLC, _ Cal.App.4th _ (2017) – A natural person was the managing member of a limited liability company. That LLC was the sole manager of a second limited liability company. The individual signed an agreement on behalf of the second LLC, but misstated his position as the managing member of the second LLC. He should have indicated that he was signing for the first LLC in the first LLC’s capacity as the manager of the second LLC. Although the individual did not have actual authority to execute the agreement on behalf of the second LLC, the second LLC was bound because he did have authority to sign for the first LLC and the first LLC had authority to bind the second LLC. The analysis was based on the California LLC Act (former Corporations Code Sec. 17157(d), continued as § 17703.01(d)), which provides that a manager has the power to bind an LLC even in the absence of actual authority (unless the other party to the agreement knows of the lack of authority). Here the first LLC, as the manager of the second LLC, had the authority to bind the second LLC and the individual, as the manager of the first LLC had authority to bind it. The misstatement of the individual’s title did not change the result.

Marblegate Asset Management, LLC v. Education Management Finance Corp., 846 F.3d 1 (2d Cir. 2017) – A restructuring of a company’s debt accomplished through a sale of assets by secured creditors and a release of guarantees of unsecured notes did not violate § 316(b) of the Trust Indenture Act because the terms of the indentures were not amended. The legal rights of the non- consenting noteholders were unaffected even though they would, as a practical matter, never receive payment because the transaction left the note issuer as nothing more than an empty shell.

Southpaw Credit Opportunity Master Fund, L.P. v. Roma Restaurant Holdings, Inc., 2018 WL 658734 (Del. Ch. Feb. 1, 2018) – Shares issued in violation of a stockholders agreement were “void” because the shareholders agreement was a “governing document” under Delaware corporate law.

Menaldi v. Och-Ziff Capital Management Group LLC, 277 F. Supp. 3d 500, 2017 WL 4386902 (S.D.N.Y. Sept. 29, 2017) – Failure to disclose potential liability for FCPA violations following receipt of subpoenas indicating governmental investigations was noncompliance with ASC 540-20 governing loss contingencies.

Yu v. GSM Nation, LLC, 2017 WL _ (Del. Ch. 2017) – A creditor of an owner of an entity, to bring an alter ego claim, must show “complete domination” of the entity by the owner.

Curci Investments, LLC v. Baldwin, _ Cal.App.4th _ (2017) – A creditor of a member of an LLC used reverse veil piercing to reach the assets of the LLC. The court held that was OK where there are no “innocent” members who would be adversely affected and where adding another creditor to the liabilities of the entity would not harm other creditors of the entity. The court noted that reverse veil piercing may be more appropriate for LLCs than it is for corporations because a creditor of a shareholder that exercises remedies against the stock typically may exercise all of the shareholder’s rights, while a creditor of a member of an LLC may be precluded from exercising those rights under LLC law.

The Cirillo Family Trust v. Moezinia, C.A. No. 10116-CB (Del. Ch. July 11, 2018) – Merger could be invalid because of insufficient documentation.

C.       Borrower Liability

In re Licursi, 573 B.R. 786 (Bankr. C.D. Cal. 2017) – The obligations of a husband and wife who guaranteed a secured loan to a corporation that they owned and operated and that sold collateral to a newly formed entity that the couple also owned, and who not only failed to inform the secured lender of the sale but continued to misrepresent the corporation’s financial condition, were nondischargeable under § 523(a)(2). Although the misrepresentations occurred after the secured lender had extended credit, they caused the secured lender to delay exercising its rights. Because the corporation was insolvent at the time of the sale, and thus the husband as an officer owed a fiduciary duty to the corporation’s creditors, the husband’s liability was also nondischargeable under § 523(a)(4). The couple’s dissipation of proceeds of the collateral was also grounds for making their obligation nondischargeable under § 523(a)(6).

D.      Disputes Among Creditors and Intercreditor Issues

U.S. Bank v. T.D. Bank, 2017 WL 436508 (S.D.N.Y. 2017) – Because the Rule of Explicitness is part of the non-bankruptcy law of New York and applies in disputes outside of bankruptcy court, if a lender is to be entitled to postpetition interest before the principal owed to a different lender may be paid, the intercreditor agreement must so state clearly. Nevertheless, by providing that the lenders were “entitled to receive post-petition interest . . . to the fullest extent permitted by law,” the intercreditor agreement in this case was sufficiently explicit that both the senior and junior lenders were entitled to postpetition interest before the principal of either the senior or junior debt may be paid. It did not matter that post-petition interest would not have been available in the bankruptcy proceeding because this was not a bankruptcy case and, in any event, the agreement defined “Obligations” to include “interest and fees that accrue after the commencement . . . of any Insolvency or Liquidation Proceeding . . . regardless of whether such interest and fees are allowed claims in such proceeding.”*

Crystal Bay Lending Partners, LLC v. JMA Boulder Bay Holdings, LLC, 2017 WL 3222271 (Nev. 2017) – The entity that bought a senior lender’s “right, title and interest in, to and under the Loan Documents” could enforce the intercreditor agreement that the senior lender had entered into when the loan was made. Even though the intercreditor agreement was not expressly listed as one of the Loan Documents, that term was defined with broad language that necessarily included the intercreditor agreement.*

Bowling Green Sports Center, Inc. v. G.A.G. LLC, 77 N.E.3d 728 (Ill. Ct. App. 2017) – Although the senior lender violated its intercreditor agreement with the junior lender by failing to obtain the junior’s consent to an increase in the senior loan, the junior was injured thereby only to the extent of the small increase in the loan. Consequently, the senior lender’s lien would be subordinated only to the extent of the increase in the debt and the junior creditor remained bound by the intercreditor agreement and could not seek to collect from the debtor until the original amount debt to the senior lender was paid.*

Marblegate Asset Management, LLC v. Education Management Finance Corp., 846 F.3d 1 (2d Cir. 2017) – A restructuring of a company’s debt accomplished through a sale of assets by secured creditors and a release of guarantees of unsecured notes did not violate § 316(b) of the Trust Indenture Act because the terms of the indentures were not amended. The legal rights of the non- consenting noteholders were unaffected even though they would, as a practical matter, never receive payment because the transaction left the note issuer as nothing more than an empty shell.

In re MPM Silicones, LLC, 874 F.3d 787 (2d Cir. 2017) – An intercreditor agreement that excepted from its debt subordination clause “any Indebtedness . . . that by its terms is subordinate or junior in any respect to any other Indebtedness” was ambiguous as to whether it referred to lien subordination or debt subordination, in part because each meaning rendered other language in the agreement superfluous. Extrinsic evidence indicates that the language did not except notes with a springing lien that was subject to lien subordination because the parties understood that those notes were not subordinated and a contrary ruling would have led to an absurd result that the notes were senior when issued but then subordinated when their springing lien sprung.*

Peterson v. Imhof, 2017 WL 1837856 (D.N.J. 2017) – Even though an intercreditor agreement required the consent of all lenders to a release of the guarantors, because the original loan documents authorized the lenders’ agent to release the guarantors with the consent of lenders holding a majority interest in the loan, the agent’s release of the guarantors pursuant to a settlement agreement was effective, despite fact that a lender with a 43.53% interest did not consent, and thus that lender had no claim against the guarantors as long as the guarantors materially performed their obligations under the settlement agreement. However, that lender did have a claim against the agent for the breach of intercreditor agreement.*

In re Energy Future Holdings Corp., 566 B.R. 669 (Bankr. D. Del. 2017) – The holders of the highest tranche of first-lien debt – the whole of which was undersecured -were not entitled to post- petition interest out of the adequate protection payments and plan distributions on the debt allocated to the lower tranches because the waterfall in the intercreditor agreement dealt only with payments out of the proceeds of collateral pursuant to the exercise of remedies. Neither the adequate protection payments nor the plan distributions constituted “proceeds” of collateral. Moreover, neither of these amounts resulted from the exercise of remedies under the loan documents. As a result, the intercreditor agreement did not speak to the allocation of payments and the payments were to be allocated pursuant to the Bankruptcy Code.*

2017-2018 Commercial Law Developments

I. PERSONAL PROPERTY SECURED TRANSACTIONS 
II. REAL PROPERTY SECURED TRANSACTIONS
III. GUARANTIES
IV. FRAUDULENT TRANSFERS AND VOIDABLE TRANSACTIONS
V. CREDITOR AND BORROWER LIABILITY
VI. U.C.C. – SALES AND PERSONAL PROPERTY LEASING
VII. NOTES AND ELECTRONIC FUNDS TRANSFERS
VIII. LETTERS OF CREDIT, INVESTMENT SECURITIES, AND DOCUMENTS OF TITLE
IX. CONTRACTS
X. OTHER LAWS AFFECTING COMMERCIAL TRANSACTIONS



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