What’s in a Name? Amendments to the Uniform Fraudulent Transfer Act

On July 16, 2014, the Uniform Law Commission (the “Commission”) approved a series of discrete amendments to the Uniform Fraudulent Transfer Act (the “UFTA”) and renamed it the Uniform Voidable Transactions Act (the “UVTA”). The UVTA is intended to address inconsistency in the courts, better harmonize with the Bankruptcy Code and the Uniform Commercial Code (the “UCC”), and provide litigants with greater certainty in its application to a fraudulent transfer action. While the amendments are not intended to completely overhaul the UFTA, there are three categories of noteworthy updates, each highlighted below.

Background

Under the UFTA, a “fraudulent transfer” exists when a debtor transfers property to a third party with the intent to hinder, delay or defraud its creditors, or, if the debtor was insolvent at the time of the transfer, the debtor received less than reasonably equivalent value for such property. The UFTA, as adopted by the individual states, provides a remedy for creditors against such third-party transferees by allowing a fraudulent transfer to be “voided” and treated as if it never happened. Consequently, the value of the property is returned to the debtor or its estate. Continue Reading

What Happens to Your Collateral During a Bankruptcy?

This post was written by Michael J. Venditto and Sarah K. Kam.

Lenders and their attorneys are conditioned to believe that being over-secured is as good as life gets for a creditor.  Lenders want to secure repayment with collateral that is valuable and liquid, while their attorneys ensure that the security interest is properly perfected.  But, post-closing confidence in a job well done can quickly evaporate if the borrower files a bankruptcy case intending to sell the collateral.

Is it true that a debtor can sell collateral without the lender’s consent?   Yes, under the Bankruptcy Code it can be done ‒ even if the collateral is sold for less than the amount of outstanding debt.  So, a secured creditor must be proactive if a distressed borrower tries to sell the collateral in a bankruptcy.  Continue Reading

Distressed Over Eligible Assignees: Who’s In, Who’s Out in Meridian Sunrise Village

 This post was written by Jonathan Korman and Bart Cicuto.

A recent decision out of the U.S. District Court for the Western District of Washington will be of interest to both lenders and borrowers of loans that are expected to be traded. In Meridian Sunrise Village, LLC v. NB Distressed Debt Investment Fund Limited, hedge funds found themselves excluded from the definition of “Eligible Assignee” under a loan agreement when the Court narrowly interpreted the meaning of “financial institutions” to exclude a distress debt fund. The Court equated “financial institutions” with “entities that make loans” rather than any entity that manages money, such as a hedge fund, ultimately resulting in the fund’s inability to vote for a Reorganization Plan.

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A $1.8 million Drafting Lesson

In a typical case of distressed borrower where the lender was left holding the unpaid debt bag,  the Fifth Circuit Court of Appeals chimed in on the hotly debated and litigated prepayment premiums litigation. In re Denver Merchandise Mart, 740 F.3d 1052 (5th Cir. 2014).  The lender was secured, with the accelerated $24 million note and the alleged prepayment penalty of $1.8 million. Not outrageous considering it was 7.5% of the outstanding principal whereas other courts enforced a 37% prepayment premium in In re School Specialty, 2013 WL 183851, at *2 (Bankr. D. Del. April 22, 2013) So why did the court send the lender home without a prepayment penalty? and 25% in In re Financial Center Associates of East Meadow, L.P., 140 B.R. 829, 839 (Bankr. E.D.N.Y. 1992).

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Alternative Lenders – The Small Business Loan Landscape

This post was written by Angela Angelovska-Wilson. 

There is no shortage of reports that indicate that small business financing has been one of the hardest hit segments during the financial crisis.  Specifically, the Cleveland Fed noted that in the years between 2007 and 2012, small business lending declined 78%.

Obviously, there is a myriad of reasons for the extreme drop in small business lending during the Great Recession.  Even today, traditional bank lenders see small businesses as less attractive and more risky borrowers than they used to be prior to the financial crisis. Fewer small business owners have the cash flow, credit scores, or collateral that bank lenders are looking for.  This gap has opened up an opportunity for non-bank, online financial services companies commonly referred to as “Alternative Lenders” that are aggressively pursuing many of the small business customers traditionally served by banks.  Continue Reading

Lending in Latin America: Risks and Considerations (Part 2 of 2)

In the second and last part of the series (click here for Part 1) we introduce additional considerations and risks associated with lending in Latin American jurisdictions. As previously noted, our observations are based on our interactions with Latin American counsel on cross-border transactions and surveys. However, we are not members of the bar in any such jurisdictions, and the considerations outlined herein should not be taken as legal advice.

1. Tax implications for lending in Latin American jurisdictions

Special attention needs to be given to the tax implications that a lending transaction to an individual located in a Latin American jurisdiction may trigger. In addition to any documentary taxes that may be applicable, withholding taxes may be imposed under the local laws of the jurisdiction in which the borrower is located in respect of the principal amount of the loan, interest payments and/or fees payable in connection with such a transaction. Similarly, local laws may impose particular requirements as to whether the borrower or the lender bears the burden of such tax and whether gross-up provisions would be enforceable under such laws. Continue Reading

Questioning the form: Moayedi v. Interstate 35

Never blindly rely on forms and boilerplate terms – negotiating contracts is much more than just defending forms, even if you’re dealing with a “repeat” transaction“. In my few months as a secondee with Reed Smith’s Houston office, this is some of the best advise I’ve received from the partners with whom I work.

The issue of deficiency offset waivers in connection with foreclosure proceedings, as demonstrated by Moayedi v. Interstate 35 / Chisam Road LP et al., case number 12-0937, currently pending before the Supreme Court of the State of Texas, is but a great example of how sound this advise actually is.

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Lending in Latin America: Risks and Considerations (Part 1 of 2)

Lending by lenders located in the United States to high-net-worth individuals located in Latin American jurisdictions has grown tremendously in the recent years and this trend is expected to continue. Although Latin American jurisdictions present unique opportunities for business expansion for US lenders, they also present risks and issues different from those in the United States, which US lenders need to be aware of before conducting business in these markets. The purpose of this two part series is to introduce the fundamental considerations and risks associated with lending in Latin American jurisdictions, taking into account the significant differences in legal regime not only between the United States and these jurisdictions but also between Latin American jurisdictions.  Our observations are based on our interactions with Latin American counsel on cross-border transactions and surveys. However, we are not members of the bar in any such jurisdictions, and the considerations outlined herein should not be taken as legal advice. Continue Reading

Comparing Agency Provisions in the United States and Europe

This post was also written by Helena Nathanson.
The Loan Syndications and Trading Association (“LSTA”) provides model agency provisions that reflect standard market practice in the United Sates primary loan markets, while the Loan Market Association (“LMA”) provides model provisions reflecting market practices in the European markets.  In the U.S., the administrative and collateral agent is typically the same institution as (or an affiliate of) the lead arranger.  By contrast, in Europe, the administrative agent is a separate institution from the lead bank and arranger, and may also be a different institution from the collateral agent.  This distinction leads to numerous differences in how the LSTA and the LMA provisions deal with agents, a few of which are discussed below.

Liability:

  • United States: The agent is not liable for actions taken (i) at the request of the majority lenders or (ii) in the absence of gross negligence or willful misconduct, as determined by a court of competent jurisdiction.  Further, the agent is not deemed to have knowledge of a default until notice is provided in writing.
  • Europe:  Generally, the agent is also not liable for actions taken in good faith; however, this is becoming a point of negotiation in European transactions.  With regards to default, the LMA requires the agent to have “actual knowledge” (which it likely would not have until written notice is provided, given the third-party agent’s distance from the transaction).

Delegation:

  • United States:  The agent may perform its duties and exercise its rights through sub-agents, and exculpatory provisions apply to sub-agents.  The agent is only responsible for negligence or misconduct of a sub-agent if a court determines the agent acted with gross negligence or willful misconduct in the selection of such sub-agent.
  • Europe:  The agent may employ sub-agents, however under English law a person remains liable for acts by delegates.  Therefore, an agent will be responsible for the negligence or misconduct of a sub-agent, regardless of how the agent acted.

Resignation:

  • United States:  The agent may resign at any time by giving notice.  The majority lenders, in consultation with the borrower, have the right to appoint a successor.  If no successor is appointed within 30 days, the agent may appoint the successor itself.  However, the resignation becomes effective after 30 days regardless of whether a successor has been appointed.
  • Europe:  The agent may not resign until a successor is in place.  Further, if the agent seeks to appoint the successor itself it typically must satisfy a number of preconditions (e.g., successor meets certain ratings or successor is approved by any number of identified parties).

Are Those Bankruptcy Waivers in Your Intercreditor Agreements Effective?

This post was written by Michael J. Venditto, a partner in Reed Smith’s Commercial Restructuring & Bankruptcy department.  A special thanks to Mike for contributing to the lending lawyer blog! 

If you have negotiated an intercreditor agreement, you are familiar with the lengthy bankruptcy waivers typically drafted by counsel for first-lien lenders.  Intended to take effect if the borrower files a bankruptcy case, these provisions commonly include advance waivers (e.g., of the junior lender’s right to seek adequate protection of its interest in the common collateral), advance consents (e.g., to the priming of the junior lender’s liens by any debtor-in-possession financing provided by the senior lender) and plan support provisions (e.g., an agreement that the junior lender will not support a plan opposed by the senior lender), to name a few in a long list.

Many of these provisions, in addition to being lengthy, are heavily negotiated.  So, it is appropriate to wonder if they actually work.  There are surprisingly few rulings analyzing these provisions and, to the extent that courts have ruled on their enforceability, the results are mixed.

Section 510(a) of the Bankruptcy Code provides that:

“[a] subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law.”

Some courts have followed the plain language of the statute and enforced intercreditor agreements according to their terms.  Other courts interpret the statute more narrowly, viewing section 510(a) as applying only to a consensual alteration of the priority of payment amongst creditors but not allowing them to alter the parties’ rights under the bankruptcy laws.  This uncertainty has given second-lien lenders some leverage.  After agreeing to bankruptcy waivers in an intercreditor agreement, they challenge the enforceability of these provisions following the commencement of a chapter 11 case by the borrower.

The problem is illustrated by looking at decisions on bankruptcy voting provisions.  Is a provision that transfers the second-lien creditor’s right to vote to accept or reject a proposed reorganization plan enforceable?  In one heavily cited decision, In re 203 North LaSalle Street Partnership, 246 B.R. 325 (Bkrtcy. N.D. Ill. 2000), a bankruptcy judge said no, ruling that an intercreditor provision giving the senior lender the right to vote the subordinated lender’s claim was not enforceable on the reasoning that it was inconsistent with Bankruptcy Code § 1126(a), which governs class voting.  But, some more recent cases have given effect to these provisions.  In re Coastal Broadcasting Systems, Inc., 2012 WL 2803745 (Bkrtcy. D.N.J. July 6, 2012) held that the assignment of voting rights was unambiguous and its enforcement was “necessary to prevent junior creditors from receiving windfalls after having explicitly agreed to accept less lucrative payment arrangements.”   Using a different rationale, another court found that a voting provision was enforceable because the junior lender had made the senior lender its agent for purposes of voting (see, e.g.In re Aerosol Packaging, LLC, 362 B.R. 43, 47 (Bkrtcy. N.D. Ga 2006), holding that the right to vote any claim in the borrower’s bankruptcy had been assigned to the senior lender with the result that it could vote the claim and take other actions in support of its own interests even if they were potentially contrary to the wishes and immediate interests of the second-lien lender).

Is there a discernable trend toward giving effect to these bankruptcy-voting provisions?  Not really.  Some decisions evidence a sentiment that sophisticated parties should be held to pre-petition agreements that are intended to streamline a chapter 11 case.  See, e.g., Ion Media Networks, Inc. v. Cyrus Select Opportunities Master Fund, Ltd (In re Ion Media Networks, Inc.), 419 B.R. 585 (Bkrtcy. S.D.N.Y. 2009) (“plainly worded contracts establishing priorities and limiting obstructionist, destabilizing and wasteful behavior should be enforced and creditor expectations should be appropriately fulfilled.”).  However, bankruptcy courts are protective of the rights of all parties to be heard and will not enforce bankruptcy waivers unless they are clear.  In re Boston Generating LLC, 440 B.R. 302, 320 (Bankr. S.D.N.Y. 2010) (“Although I believe it goes against the spirit of the subordination scheme in the Intercreditor Agreement to allow the Second Lien Lenders to be heard and to attempt to block the disposition of the Collateral supported by the First Lien Agent, I am … constrained by the language of the Intercreditor Agreement. After extensive briefing and oral argument as well as detailed review of the Intercreditor Agreement, the Court finds no provision which can be read to reflect a waiver of the Second Lien Agent’s right to object ….”).

The case law on the enforceability of intercreditor provisions that go beyond mere lien and payment subordination remains unsettled.  Nevertheless, these provisions are an important element of intercreditor agreements and first-lien lenders will not, and should not, be willing to eliminate them.

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