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11th Circuit Holds Consumer Lenders Can’t Include Estimated Expenses In Pre Closing Reinstatement or Payoff Letters; What You Should Do About This Remarkable Opinion

December 14, 2015


Editor’s Pre- / Post-Script:  The original post about this case was, frankly, a bit sarcastic toward the consumer borrower, and made light of a serious matter.  (Your author Mark Duedall is to blame for that.)  When the post found its way to the borrower’s counsel, he was kind enough to let us know, as Paul Harvey would say, “the rest of the story.”  And that was this – the borrower was down on his luck, a hard working public servant, but eventually managed to come up with the funds needed to pay his bills (including this loan) in full.  Truly, an individual deserving to be treated fairly in all respects.  But when he paid the loan in full, including the estimated future charges, the lender then refused to refund the estimated future charges that the borrower had paid in full (and that the lender did not incur).  Yikes; the consumer had no choice but to sue to get back his money for these phantom charges.  We here at the Bankruptcy Cave don’t like over-reaching at all, and especially when it comes to how one treats consumers.  Anyway, while we still disagree with this ruling from a legal standpoint, we start to kind of like it from a karma standpoint.  We appreciate getting more of the story, and the opportunity to correct this post.  Lesson learned by the dwellers of the Bankruptcy Cave.

Anyway, on to the post, as corrected . . .

Consumer borrowed money from Lender.  Consumer defaulted, and Lender began to foreclose, including all the usual steps: arranging for property  inspection, hiring counsel, etc.  After about a year,[1] Consumer sought to reinstate the loan, and asked Lender how much it would cost.  Lender responded in writing, with an itemized list of expenses to be paid, plus an estimate of additional costs (clearly marked as estimates) that Lender may incur over the next month if it continued to exercise remedies, in case Consumer did not make good on the loan.)

Consumer paid the entire amount required to reinstate the loan, including Lender’s estimated out-of-pocket expenses.  A few months later, Lender refunded the estimated expenses which it didn’t incur after all (although Lender first refused any and all efforts by the consumer to get any refund).  So what’s the big deal?  Why is this unusual?  Why are you reading this, and why did we write it?  Well, in the 11th Circuit, as of last week, including any estimated future charges or expenses in a reinstatement letter (or a loan payoff, as your authors can’t see any reason why this remarkable ruling wouldn’t also apply to payoff letters) violates the federal Fair Debt Collection Practices Act (FDCPA)[2] if your loan documents don’t clearly allow for that inclusion (and most don’t – we checked).  This is the ruling in Prescott v. Seterus, Inc., 2015 U.S. App. LEXIS 20934 (11th Cir. Dec. 3, 2015).

So what can you do about this ruling?  First, fix your loan forms.  In  Prescott, the loan documents listed all the things a consumer must pay to reinstate a loan – estimated out-of-pocket expenses through the payoff date was not included as something Lender could collect as a condition to reinstatement.[3] (And please don’t think “my loan documents surely must be state of the art and already contain this.”   The originating lender in this case was one of the largest in the U.S., with top, up-to-date forms and rigid standardization to ensure everyone uses the proper documentation.  Its loan documents still did not allow for the inclusion of estimated expenses in payoff statements.)  Your loan documents should clearly state that any reinstatement or payoff statement can and will include estimates of charges through the payoff date (which will be promptly refunded if those charges are not actually incurred).  Second, change your reinstatement and payoff letters, to provide the same.[4]  Third, bear in mind the “least sophisticated consumer” mandate of the FDCPA: your consumer loan documents must spell everything out in painful, page-after-page detail, thus devolving to the lowest common denominator of consumer borrowers.[5]

Your helpful and devoted Bryan Cave Bloggers have blogged before about our efforts to improve lender forms to avoid ridiculous decisions.  Of course, this is nothing to think about as the Holidays approach.  Go here instead, and pick a wonderful day to celebrate.  And then, put a note on your calendar to call us after the start of the year; we do loan document house-cleaning for many clients, and would love to help you out.  Until then, enjoy the egg nog and watch out for including estimated out-of-pocket expenses in any payoff or reinstatement letters, unless your loan documents expressly allow it.


[1] The property was in Florida, a state requiring judicial foreclosure, so exercising remedies against collateral takes forever.

[2] 15 U.S.C. § 1692 et seq.

[3] Prescott, 2015 U.S. App. LEXIS at *2 and *7.

[4] Our angst over this maddening opinion is informed by another recent ruling, Kaymark v. Bank of America, 783 F.3d 168 (3d Cir. 2015). In that case, the lender was chastised for including estimates of future costs in a foreclosure complaint. This violated the FDCPA because the estimates were not labelled as such. Id. at 175. So, the Lender in Prescott followed this ruling, and did note which charges in the reinstatement letter were estimates. And then it refunded the amounts not actually incurred a few weeks later. It is still liable for violating the FDCPA. The world has turned upside down, we think.

[5] Id. at *6-*8 (citing, among other cases, Jeter v. Credit Bureau, Inc., 760 F.2d 1168, 1175 n.6 (11th Cir. 1985), holding that you must assume you are dealing with a borrower “on the low side of reasonable capacity.”).

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10th Circuit Holds That First Time Transactions Fall Within 11 U.S.C. 547(c)(2), Ordinary Course of Business Defense

October 16, 2015


In a decision that surprised many, the United Stated Circuit Court of Appeals for the Tenth Circuit (the “10th Circuit Court of Appeals”) affirmed decisions finding that a payment made on account of a first time transaction between a debtor and creditor can qualify for the ordinary course of business defense under 11 U.S.C. § 547(c)(2).

C.W. Mining Company (the “Debtor”) entered into an equipment agreement with a new contractor, SMC Electric Products, Inc. (“SMC”), in an attempt to increase the Debtor’s coal production. This agreement was reached several months before the filing of an involuntary bankruptcy petition. Within 90 days of the involuntary bankruptcy filing, the Debtor made the first payment under the agreement in the amount of $200,000 to SMC via wire transfer. The Trustee filed an adversary proceeding seeking to avoid and recover the $2000,000 payment under 11 U.S.C. §§ 547(b) and 550, as an alleged preferential transfer. The bankruptcy court ruled that the payment could not be avoided because it was made in the ordinary course of business of the Debtor and SMC and was therefore protected by 11 U.S.C. §§ 547(c)(2). The United States Bankruptcy Appellate Panel affirmed the bankruptcy courts decision.

In affirming the decision, the 10th Circuit Court of Appeals held that the fact that the Debtor and SMC had entered into the agreement for the first time and that the alleged preferential payment was the first payment under the agreement did not alter the applicability of 11 U.S.C. § 547(c)(2). Under § 547(c)(2), a trustee may not avoid a transfer “to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee” when “such transfer was….(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or (B) made according to ordinary business terms.” The incurrence of the debt and the payment must be in the ordinary course of business for both the debtor and the transferee. See 11 U.S.C. § 547(c)(2) (emphasis added). The 10th Circuit Court of Appeals held that the statute refers to the “ordinary course of business or financial affairs of the debtor and the transferee,” not between the debtor and transferee. C.W. Mining, U.S. App. LEXIS 13981, at 10 (emphasis added). Further, the 10th Circuit Court of Appeals agreed with the Sixth, Ninth and Seventh Circuits that have held that a first time transaction can be protected by 11 U.S.C. § 547(c)(2). Wood v. Stratos Prod. Dev., LLC (In re Ahaza Sys. Inc.), 482 F.3d 1118, 1126 (9th Cir. 2007). (“[A] first-time debt must be ordinary in relation to this debtor’s and this creditor’s past practices when dealing with other, similarly situated parties.”); Kleven v. Household Bank F.S.B., 334 F.3d 638, 643 (7th Cir. 2003)( “[T]he court can imagine little (short of the certain knowledge that its debt will not be paid) that would discourage a potential creditor from extending credit to a new customer in questionable financial circumstances more than the knowledge that it would not even be able to raise the ordinary course of business defense, if it is subsequently sued to recover an alleged preference.”) (quoting Warsco v. Household Bank F.S.B., 272 B.R. 246, 252 (Bankr. N.D. Ind. 2002); Gosch v. Burns (In re Finn), 909 F.2d 903, 908 (6th Cir. 1990)(“Obviously every borrower who does something in the ordinary course of her affairs must, at some point, have done it for the first time.”).

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The A++, Super Comprehensive, Don’t Ever Start Anywhere Else Set of Opening Questions, Introductory Matters, and Document Inquiries for Taking a Deposition

August 31, 2015


Santa holding wish list isolated

The A++, Super Comprehensive, Don’t Ever Start Anywhere Else Set of Opening Questions, Introductory Matters, and Document Inquiries for Taking a Deposition [1]

Have you ever had to press garlic for a recipe? Or put together a Swedish bookshelf, purchased from a Swedish superstore? Yes, you have – and you may have succeeded, so long as you had a garlic press, or the bag of special Swedish tools respectively. But what if you don’t? Yikes. An easy part of the job becomes hard; your likelihood of failure increases, substantially.[2]

Practicing law is often the same. Certain tasks are very complicated. Reasoning, analysis, complex drafting, making hard things simpler for busy clients to understand – not easy stuff. But with the correct tools, forms, checklists, and honed skills, you can render some of the harder tasks easier, allowing you to focus your time, smarts, and passion on the really tough part of the assignment.

Now, this is not to say the right tool makes for a perfect end result. Preparing Mom’s classic lasagna is no slam dunk, even if you purchased your garlic press from the high?end kitchen store. And the Swedish bookshelf, even with the complete set of tools, well . . . next subject.

So in the first of a long series, we are circulating our best checklists, scripts, do’s and don’ts, and the like. Our first: the introductory matters, opening scripts, and initial questions (word?for?word) to use in any deposition. Why try to remember all the usual opening stuff? (BTW, you never will – there are twelve pages of opening questions and tips, each of them serving a unique purpose, as set forth below). Why scramble the night before the deposition, writing out introductory things (for the nth time), taking you away from preparing for the substance of the deposition, such as key dates, words, thoughts, and documents? We hope that after you read this article, such exercise will be a thing of the past.

Below you will find the following:

  • In case you need more convincing, a preamble of classic deposition errors, made in the first minutes of the deposition, due to the lack of a comprehensive, word?for?word script of introductory matters and questions.
  • The script: a comprehensive, word?for?word list of every opening question and introductory matter for your deposition.[3]

But wait, there’s more!

  • Virtually every deposition deals with documents. But before asking about the substance of a document, ask about its history and minutia – who drafted it? Were there prior versions? Did other people work on it? For how long? Did the deponent ever make notes on it? Or on a prior draft? And where are those notes today?
  • So as your added bonus, we include “The Forty-One Questions to Ask About Every Single Document in a Deposition.”

We hope this is helpful to you.


Part I: Classic Deposition Errors –

Often Made in the First Minutes of the Deposition

These have happened to all of us (or a colleague we know) when taking a deposition:

  • You ask the deponent if she has ever been deposed before, but forget to ask if she has ever testified at trial. Thus, you fail to obtain some good information on the deponent. Worse, you don’t know to obtain a trial transcript from some old case to reveal how the deponent holds up (or breaks down) under cross-examination.
  • You ask the deponent how he is feeling that day. He says, “fine.” But you forget to also ask if he is taking any medication. Halfway through the deposition (or afterward, such as when the “read and sign” comes back), you learn the deponent was medicated that day. Or as high as a kite. The deposition is more or less worthless. You probably have to take it again. And you have to explain to the client why it has to pay your billable rate to prepare again, and also take the deposition again (and pay for the new transcription expense) – because you didn’t have a script of opening questions covering this point.
  • You ask the deponent about a document. But you forget to ask if the deponent knows of any prior versions. Or, you actually remember to ask about prior versions, and the deponent states “I don’t know of any.” Yet then, you forget to ask the follow up: “Is there anyone that would know of any prior versions?” And so, you never get the real answer you need: “Well, Ted and Sally ran with the document for a while before I got involved.” This is information you need – it might be critical – but by failing to have written down every single follow up question you should ask about every single document (see Part III, infra), you miss out.
  • You ask the deponent if she has ever been convicted of a crime. But you forget to ask if she has ever filed for bankruptcy or been denied a discharge in bankruptcy. You fail to obtain important information about the deponent and her past fraud or wrongdoing.
  • The attorney defending the deposition asks at the outset if “the usual stipulations apply.” Not wanting to appear uncooperative, or inexperienced, you say “of course.” But why would you agree to ground rules that are not clearly stated? At best, the other lawyer is being lazy and co?opting you into equal laziness. At worst, the other lawyer is creating a record that you agreed to whatever rule, waiver, or system that he later creates to attempt to limit the use of your outstanding deposition.[4]
  • For instance, “the usual stipulations” typically includes waiving the deponent’s right to read and sign. But in some jurisdictions, if the deponent is a non?party, waiving the read and sign process precludes you from using the deposition at trial, unless the other party to the lawsuit also agrees to waive the read and sign. If the other party to the lawsuit simply sat there during your opening of the deposition, saying nothing and smiling as you agreed to “the usual stipulations” mentioned by the non-party deponent’s counsel, then you have likely waived your ability to use the deposition at trial.[5] You have made an error – a very serious one – by agreeing to unstated “usual stipulations.”

The examples are myriad. But it doesn’t have to be this way. None of these are strategic mistakes – they are simply a failure to have, and use, a tried and true list of opening questions and descriptions of the rules of deposition. But fear no longer! Review the attached, and file it away. (Or email your authors for a word version, to cut and paste in to your next deposition outline.) Put the opening stuff on autopilot with the following script, and spend your time and energy on the real deposition preparation.

To continue reading, please download:

Part II: The Word for Word Script of Every Opening Question and Introductory Matter for your Deposition

Part III: The Forty-One Questions to Ask About Every Single Document in a Deposition


[1] The Authors wish to thank Wendy Godfrey and Melissa Kotun of Bryan Cave, and Juan Martinez (Emory University School of Law Class of 2015), for their suggestions, additions, and thoughtful revisions, in making this as comprehensive as possible for our fellow litigators.

[2] For some comic relief in the middle of your hard day, enter “What can I use if I don’t have a garlic press?” into the website YAHOO! ANSWERS, https://answers, (last visited July 28, 2015). Some great responses: “a Chinese knife would be best,” “I used a hammer,” and of course, the classic, “run out and buy a garlic press.”

[3] We don’t pretend to be perfect! If you have others, or better formulations, please contact your authors, we would love to hear from you and include them in a future iteration of this document, with full credit to you.

[4] See Stephen D. Archer, The Dangers of the “Usual Stipulation” in Deposition Practice, Los Angeles Bar Association Survival Guide for New Attorneys, Fall 2006, at 46

[5] See Fla. R. Civ. P. 1.310(e) (requiring all parties to agree to allow a deponent to waive signature, if the deposition transcript is to be used at trial).

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Inside The N.D. Ill.’s Broad Reading Of Section 546(e)

May 11, 2015

Authored by:


In what appears to be a case of first impression, the United States Bankruptcy Court for the Northern District of Illinois has concluded that payments to a master servicer of a commercial mortgage backed securitization (a “CMBS”) could not be avoided as either allegedly constructively fraudulent transfers or as allegedly preferential transfers because the securities contract “safe harbor” under section 546(e) of the Bankruptcy Code precluded such claims. Krol v. Key Bank Nat’l Ass’n. (In re MCK Millenium Centre Parking, LLC), 2015 Bankr. LEXIS 1432 (Bankr. N.D. Ill. Apr. 24, 2015). A Bryan Cave team, led by New York partner Larry Gottesman, represented the defendants.

The background of the decision is straightforward. The chapter 7 trustee of the debtor brought an adversary proceeding against Key Bank (“Key”), as master servicer, and the related CMBS trust, alleging that the debtor had made loan payments on a loan owed by the debtor’s affiliate. The plaintiff alleged that these payments were avoidable as both intentional and constructive fraudulent transfers under the Bankruptcy Code and analogous provisions under Illinois state law, as well as constituting preferential transfers. The defendants moved to dismiss the amended complaint on a variety of grounds, including that all claims for relief other than the actually fraudulent transfer claim under section 548(a)(1)(A) were barred by the section 546(e) safe harbor.

Section 546(e) provides in pertinent part that “the trustee may not avoid a transfer that . . . is a transfer made by or to (or for the benefit of) a . . . financial institution, . . . in connection with a securities contract, as defined in section 741(7), . . . that is made before the commencement of the case, except under section 548(a)(1)(A).” The effect of section 546(e) is simple: prepetition transfers within its scope are avoidable only if determined to be actual fraudulent transfers avoidable under section 548(a)(1)(A). All other prepetition transfers by a debtor are unavoidable. Three elements are required to invoke section 546(e): First, the trustee must seek to avoid prepetition transfers pursuant to one or more of the listed Bankruptcy Code provisions. Second, such transfers must have been “made by or to (or for the benefit of) a . . . financial institution.” Third, such transfers must have been “in connection with a securities contract, as defined in section 741(7).”

The defendants argued that the alleged payments by the debtor fell squarely within section 546(e). The bankruptcy court agreed. First, the parties did not dispute that Key, the master servicer, was a “financial institution” as that term is defined in the Bankruptcy Code. The bankruptcy court rejected the plaintiff’s argument that Key’s status as a financial institution should be ignored on the ground that Key did not receive the transfers for its own benefit and use, noting that, as concluded by the majority of courts to consider the issue, the plain language of section 546(e) required that Key be treated as a financial institution notwithstanding Key’s mere conduit status. 2015 Bankr. LEXIS 1432, at *24–25.

Second, the bankruptcy court agreed that the alleged transfers were in connection with a securities contract. The definition of a securities contract under section 741(7) includes any “contract for the purchase, sale, or loan of . . . a mortgage loan, any interest in a mortgage loan, a group or index of . . . mortgage loans or interests therein . . . .” The bankruptcy court concluded that a CMBS transaction falls within this definition, as it involves the sale of mortgages into the CMBS trust by the depositor and the related sale of certificates representing interests in this trust to investors. Id. at *26–32. The bankruptcy court also agreed that the alleged transfers were made “in connection with” such securities contract, as the payments were related to the securitization, even if not made in connection with the purchase or sale of securities. Id. at *32–33.

The implications of the Krol decision are twofold.   First, Krol signals a broad reading of section 546(e) and a willingness by the bankruptcy court to adhere to the plain text of the statute.   Second, Krol gives special servicers of securitized commercial mortgages a potent defense against potential avoidance claims.

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Spring Cleaning, Avoidance Actions, and Time to Tweak the Loan Forms, Just In Case

April 3, 2015

Authored by:


Winter is over; time for spring cleaning. Alas, your authors are so desperate to put off such drudgery that they decided to write about avoidance actions, and form language for notes and security agreements. If you represent lenders, try taking five from the cluttered garage, dust-bunnied closet, or bursting kitchen junk drawer, and read this; you may save your lender client a buck or two.

The Basics: Workout lawyers all agree on certain principles. For instance, fully secured creditors with undisputed claims deserve to be paid. Further, if the collateral value exceeds the amount of the secured creditor’s claim then payment must include interest, costs, and attorneys’ fees, if the loan documents so provide.[1]

The Wrinkle: But add a wrinkle – the kind of wrinkle rarely considered when structuring a loan, in the glorious salad days of the lending relationship. That wrinkle: Upon the obligor’s bankruptcy, what if the obligor, or its bankruptcy trustee, sues the lender to recover a preference or fraudulent transfer to the lender made prior to the bankruptcy?[2] If the lender defeats such an action, then surely the principles listed above would allow the lender to automatically add its defense costs to its claim, and collect those costs from the collateral or the bankruptcy estate. A recent California ruling says “yes” but notes that some less than ideal loan drafting made it a very hard call.[3] It also notes other rulings featuring unhappy lenders left with large, unpaid legal bills despite a failed attempt by a borrower/trustee to claw back monies properly and validly paid to the lender. So read below, tweak your forms on the front end (see suggested language at the end of this missive), and try to avoid this ever happening to your lender client.

The Facts: The obligor, Mac-Go (the “Obligor”) and its affiliates enter into various loans with a bank (the “Lender”). Later, the Obligor enters bankruptcy and a trustee (the “Trustee”) is appointed. The Trustee asserts various avoidance actions against the Lender, alleging that the Obligor previously paid money to the Lender actually owed by other affiliates, the Obligor did not receive value for the loans, the Obligor preferred the Lender over other creditors, and other claims. The Trustee and the Lender litigate for three years. The Trustee loses. And the Lender has spent $350,000 in attorneys’ fees.[4]

The Problem: There are enough funds in the bankruptcy estate to pay secured claims in full, including the Lender. But the problem is the Lender’s loan documents, and the nature of an avoidance action. Here, the Lender’s documents required the Obligor to pay all fees and costs of collection. And all costs and fees incurred by the Lender to enforce the loan. And all costs, expenses, and fees to enforce the Lender’s collateral and lien rights. Indeed, one loan document stated that enforcement costs included fees and legal expenses in bankruptcy proceedings.[5] Unfortunately, a Trustee’s suit to recover past payments to the Lender, and the Lender’s efforts to protect prior payments, isn’t really “collection.” Nor is it “enforcement,” as the Lender is trying to keep what it has, instead of an effort by the Lender to get what it doesn’t. And although the Trustee’s avoidance suit took place in a “bankruptcy proceeding,” the Trustee’s suit was not part of the Lender’s “enforcement” of its rights (and the word “enforcement” modified all subsequent phrasing in the loan documents). As such, the Bankruptcy Court struggled with whether the Lender was entitled to add its $350,000 in attorneys’ fees to its claim amount, despite the Lender’s defeat of the Trustee’s avoidance action.

The Ruling: After surveying the case law, including the many cases where attorneys’ fees provisions were not sufficiently broad, the Court ruled in the Lender’s favor. But it was only due to California case law, which (for the most part) does not narrowly construe fee clauses in contracts.[6] And the ruling was despite another Ninth Circuit ruling that a preference suit challenging the creation of a security agreement was not an action regarding the “enforcement” of the security agreement – in that case, the Lender won the suit, but got $0 added to its claim for fees or costs.[7] Indeed, the impartial reader may think the Mac-Go Court was struggling to find a way to rule in the Lender’s favor, despite other cases holding that “enforcement” and “collection” have nothing to do with fighting off an effort to claw back what a lender or other creditor has already received.

The Solution: Revise your form note and security agreement. Make sure the attorneys’ fees provision covers fighting off efforts to reclaim or avoid prior payments. Your authors suggest a provision such as the below; the bolded language may be an unusual thing to add at the start of a lending relationship, but could indeed be helpful on the back end, when debtors or trustees try their worst:

Borrower agrees to pay, upon demand, all of Lender’s costs and expenses,[8] including Lenders’ reasonable attorneys’ fees, legal expenses, court costs, and any other costs of any type or kind incurred by Lender: (i) to enforce this Agreement, (ii) to collect any amounts owed to Lender, (iii) in any bankruptcy, insolvency, assignment for the benefit of creditors, receivership, or other similar proceeding relating to Borrower or its assets, (iv) in any actual or threatened suit, action, proceeding, or adversary proceeding (including all appeals) by, against, or in any way involving Lender and Borrower, or in any way arising from this Agreement or Lender’s dealings with Borrower, and (v) to retain any payments or transfers of any kind made to Lender by or on account of this Agreement, including the granting of liens, collateral rights, security interests, or payment protection of any type. Lender may hire or pay someone else to enforce this Agreement or protect Lender’s rights under this Agreement, the costs of which are included in the amounts set forth above and are part of Lender’s right to payment by Borrower.



[1]           See 11 U.S.C. § 506(b).

[2]           See, e.g., 11 U.S.C. § 547(b), 548(a)(1).

[3]           In re Mac-Go Corp., Case No. 14-44181, Memorandum Decision at Docket No. 235 (Bankr. N.D. Cal. March 20, 2015).

[4]           Id. at p. 1; see also Poonja v. First National Bank (In re Mac-Go-Corp.), Adv. Proc. No. 14-04148, Order on Summary Judgment at Docket No. 80 (Bankr. N.D. Cal. May 23, 2014).

[5]           In re Mac-Go, Docket No. 235, at pp. 2-3.

[6]           Id. at pp. 6-8.

[7]           Id. at p. 11 (citing Williams v. Official Unsecured Creditors’ Comm. (In re Connolly), 238 B.R. 475 (9th Cir. B.A.P. 1999)).

[8]           Revised drafting may be needed if the applicable state law allows the recovery of a set percentage of the loan as “reasonable attorneys’ fees.” See, e.g., O.C.G.A. § 13-1-11(a)(2) (providing that “reasonable attorneys’ fees” in a note automatically means 15% of the first $500 owed and 10% of the amount owed that is greater than $500). But even in that situation, you should make sure the events giving rise to a fee claim include a trustee’s or debtor’s subsequent avoidance action, and not just the more generic “enforcement” or “collection.”

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Second Circuit Decision Reminds Us to Double-Check Documents

March 13, 2015


Official Committee of Unsecured Creditors v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), Appeal No. 13-2187 (2nd Cir. Jan. 21, 2015)

Second Circuit Decision Reminds Us to Double-Check Documents

In a decision that sent a shiver down the spine of attorneys and lenders alike, on January 21, 2015, the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) ruled that JPMorgan Chase Bank, N.A. (“JPMorgan”) had released its security interest on a $1.5 billion loan to General Motors (“GM”) by inadvertently filing a UCC-3 termination statement. The Second Circuit held that although JP Morgan and GM did not intend to terminate the security interest at issue, the termination was effective because JP Morgan authorized the filing of the UCC-3 termination statement.

In October 2001, GM entered into a synthetic lease financing transaction (“Synthetic Lease”), by which it obtained approximately $300 million in financing from a syndicate of lenders (the “Lenders”) including JPMorgan who served as the administrative agent. The Synthetic Lease was secured by mortgages on several pieces of real estate, which were perfected by the filing of two UCC-1 financing statements by JPMorgan (the “Synthetic Lease UCC-1s”). Separately, GM entered into an unrelated term loan facility (the “Term Loan”). JPMorgan also served as the administrative agent on this loan. The Term Loan was secured by security interests in a variety of GM’s assets, including equipment and fixtures at forty-two facilities throughout the United States. JPMorgan properly filed UCC-1 financing statements to perfect its security interest in the various assets, including one such statement filed in Delaware covering all of GM’s equipment and fixtures at 42 of the facilities (the “Term Loan UCC-1”).

In September 2008, as the Synthetic Lease was nearing maturity, GM decided to pay-off the loan and contacted its counsel to prepare the necessary documentation, including documents to release the Lender’s security interests. In order to prepare the documents necessary to terminate the Lender’s security interests, GM’s counsel ordered a search for UCC-1 statements that had been recorded against GM in Delaware. This search yielded three UCC-1s: the Synthetic Lease UCC-1s and the Term Loan UCC-1. As part of the transaction, GM’s counsel prepared a closing checklist and UCC-3 termination statements to terminate all three security interests, mistakenly including the Term Loan UCC-1. Although all parties and their counsel reviewed the checklist and the draft documentation, no one caught the error. In October 2008, GM paid off the Synthetic Lease and the three UCC-3 termination statements were filed with the Delaware Secretary of State.

The mistake went unnoticed until 2009 when GM filed its Chapter 11 bankruptcy. JPMorgan became aware of the inadvertent filing of the UCC-3 statement relating to the Term Loan. JPMorgan advised the Official Committee of Unsecured Creditors (the “Committee”) appointed in GM’s bankruptcy of this filing mistake and asserted that the Term Loan was secured nonetheless because the filing was ineffective because it was unauthorized. The Committee commenced the underlying action against JPMorgan seeking a determination that, despite the error, the UCC-3 statement with respect to the Term Loan was effective and the Term Loan was unsecured. JPMorgan opposed this determination under UCC §9-509(d)(1) because it did not intend to terminate the security interest related to the Term Loan, therefore, the filing was not authorized and was not effective. The United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) agreed with JPMorgan and held that the mistaken UCC-3 statement was unauthorized and therefore not effective to terminate a secured lender’s interest in a debtor’s property. The Committee filed a direct appeal of the Bankruptcy Court’s decision to the Second Circuit.

The Second Circuit certified the question related to interpretation of UCC §9-509(d)(1) to the Delaware Supreme Court because it presented a significant issue of Delaware state law. The Delaware Supreme Court held that under UCC §9-509(d)(1) if the secured party of record authorized the filing of the UCC-3 statement, that statement is effective regardless of whether the secured party subjectively intended or understood the effect of filing the statement. The Second Circuit then held that although JP Morgan never intended to terminate the Term Loan UCC-1, it clearly authorized the filing of the UCC-3 statement with respect thereto. Accordingly, the Second Circuit held that the UCC-3 with respect to the Term Loan was effective, reversing the Bankruptcy Court’s decision, and thereby rendering the Term Loan unsecured.

This decision provides a terrifyingly simple, and for parties involved costly, reminder to always double check your documents.

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Voidable If Not Fraudulent — NCCUSL Approves the Uniform Voidable Transactions Act

November 12, 2014


In July 2014, the National Conference of Commissioners on Uniform State Laws (NCCUSL) approved the Uniform Voidable Transaction Act (UVTA), a long-awaited update to the Uniform Fraudulent Transactions Act (UFTA). As the new title suggests, the UVTA, like the UFTA before it, encompasses a broader range of transactions than those traditionally deemed fraudulent and therefore avoidable under the common law. The amended Act clarifies and expands the burden of proof as well as presenting new challenges and opportunities to creditors seeking to avoid transfers by debtors operating under insolvent conditions. This development also has importance for creditors with claims in bankruptcy due to the bankruptcy trustee’s power to bring avoidance actions based on state law under 11 U.S.C. § 544(b) and thereby increase the assets available to repay debts.

Under the amended Act as before, creditors bringing constructive fraudulent transfer claims have the ability to avoid transactions which deprive the debtor of assets that could otherwise satisfy debts to creditors when the debtor is or is presumed to be insolvent; however, several key updates affect which debtors are insolvent within the meaning of the amended Act. The UFTA specifies that a debtor is presumed to be insolvent when it is not generally paying its debts as they became due. The UVTA clarifies that, for this vital presumption to apply, the debts must not be the subject of a bona fide dispute. It also specifies that the party opposing the presumption (usually, the transferee of the debtor’s property) carries the burden of disproving the presumption and can avoid this presumption by a preponderance of the evidence standard. This burden-shifting provision is new and runs contrary to prior case law in some jurisdictions. See, e.g., Liebersohn v. Campus Crusade for Christ, Inc. (In re C.F. Foods, L.P.), 280 B.R. 103, 115 (E.D. Penn. 2002).

The amended Act also clarifies that creditors seeking to avoid certain transfers regardless of insolvency continue to hold the burden of proof as to all elements. Under both UFTA and UVTA, a present or future creditor could avoid a transaction if it was made while a debtor was insolvent and (i) with actual intent to hinder, delay, or defraud a creditor, as evidenced by the enumerated “badges of fraud”; (ii) without receiving reasonably equivalent value in exchange for the transfer, but only if the debtor retained assets unreasonably small in relation to the transaction or if the debtor incurred or should have believed would incur a debt beyond the debtor’s ability to pay. While under the UFTA, these actions were deemed “fraudulent,” the UVTA implements the more modern term “voidable.” Now as before, insolvency is irrelevant to these The UVTA clarifies that the creditor continues to hold the burden of proving these elements regardless of the debtor’s insolvency.

In certain other transactions, creditors holding claims at the time of the alleged transfer can avoid a transaction if the debtor was insolvent at the time the transfer was made. Under both UFTA and UVTA, a present creditor can avoid a transfer or obligation (i) entered into or incurred without receiving reasonably equivalent value if the debtor is insolvent at the time or became insolvent as a result of the transaction or (ii) a transfer made to an insider for a preexisting debt while the debtor was insolvent and if the insider had cause to believe the debtor was insolvent. Again, UVTA clarifies the burden of proof by establishing that, subject to the burden of proof regarding the debtor’s insolvency, the creditor must establish that a transfer is avoidable by a preponderance of the evidence.

Importantly for creditors, the UVTA also narrows slightly the range of transferees against whom a creditor can maintain an avoidance action. Whereas under UFTA, a creditor could avoid a transfer by the first transferee or any subsequent transferee who took property of the debtor other than in good faith for value, the new act specifies that subsequent transferees must be “immediate or mediate transferee of the first transferee,” implying that, even in a chain of transferees acting in bad faith, the creditor must act within a reasonable period of time or number of transfers. This language incorporates the current wording—and likely the current case law—of the federal Bankruptcy Code at 11 U.S.C. § 548.

Finally, the UVTA for the first time provides clear rules for determining the governing law with respect to actions seeking to void transfers or obligations of the debtor. Now, the law that applies is the local law of the jurisdiction where the debtor is located, which is determined according to straightforward rules. The UVTA also provides for its application to different series within a series organization (i.e., usually a series limited liability company, which is now available in many jurisdictions). Each series within a series organization is now considered to be legally separate for purposes of actions to void transfers. This provision will allow creditors to avoid a broader range of transfers occurring within series organizations, where each series was not previously considered a separate person or organization and could not, therefore, technically make voidable transfers of assets between series for purposes of the UFTA.

UFTA was one of NCCUSL’s success stories, having been adopted in every U.S. jurisdiction except for New York, Maryland, Virginia, Kentucky, South Carolina, Louisiana, Alaska, and Puerto Rico. The pace and geographic spread of UVTA will be important for creditors as well as a gauge of NCCUSL’s continued influence in the law of creditor’s rights.

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Case Updates: Glaski v. Bank of America  and Sandri v. Capital One

October 9, 2014


The California Court of Appeal for the Fifth Appellate District has held that a borrower has standing to state a claim for wrongful foreclosure based on the alleged improper securitization of the borrower’s note and deed of trust. Glaski v. Bank of America, N.A., et al., 218 Cal. App. 4th 1079 (Cal. App. 5th Dist. 2013). This is a minority view. Rejecting both the holding and reasoning of the Glaski court, and adopting the majority view, the U.S. Bankruptcy Court for the Northern District of California reached a contrary conclusion. Sandri v. Capital One, N.A., et al. (In re Sandri), No. 12-3165DM, 2013 WL 5925655 (Bankr. N.D. Cal. Nov. 5, 2013).

I. Glaski v. Bank of America, N.A., et al., 218 Cal. App. 4th 1079 (Cal. App. 5th Dist. 2013)

Factual Background and Procedural History:

In mid-2005, appellant Glaski obtained a purchase money loan from lender Washington Mutual Bank, FA (“WaMu”). The loan was secured by a deed of trust against Glaski’s residence, identifying WaMu as the lender and beneficiary. In late-2005, the WaMu Mortgage Pass-Through Certificates Series 2005-AR17 Trust was formed as a securitized trust under New York law. Glaski alleged that his note, and the deed of trust securing it, were ineffectively transferred to the trust.

Glaski defaulted under the note and deed of trust by failing to make monetary installment payments when due. In December 2008, a successor trustee of the trust commenced non-judicial foreclosure proceedings, and in July 2009, the property was sold at foreclosure pursuant to the power of sale provisions in the deed of trust. Shortly thereafter, Glaski commenced wrongful foreclosure proceedings against several defendants, including JPMorgan Chase Bank, N.A., as acquirer of WaMu’s interest in the subject loan, and Bank of America, N.A., as successor trustee of the securitized trust. In his suit, Glaski asserted, among other theories, that the failure to timely and properly transfer his loan into the securitized trust in violation of the trust’s pooling and servicing agreement deprived defendants of their authority to foreclose under the deed of trust.

In September 2011, defendants demurred to Glaski’s operative complaint. Two months later, the trial court sustained defendants’ demurrer and dismissed Glaski’s wrongful foreclosure claims without leave to amend.

Glaski timely appealed.

Holding and Analysis:

Reversing the trial court’s judgment for dismissal, the court of appeal concluded that Glaski had standing to challenge the foreclosure sale based on the alleged untimely transfer of his note and deed of trust into the securitized trust.

The appeals court expressly acknowledged that in wrongful foreclosure cases based on a purportedly ineffective loan assignment, “a question often arises about the borrower’s standing to challenge the assignment of the loan … an assignment to which the borrower is not a party.” Id. at 1094. Indeed, in making its determination, the appellate court declined to follow the ruling of several federal district courts sitting in California, rejecting the post-closing date theory of invalidity on the grounds that the borrower does not have standing to challenge an assignment between two other parties. See, e.g., Aniel v. GMAC Mortgage, LLC, No. C 12–04201 SBA, 2012 WL 5389706 (N.D. Cal. Nov. 2, 2012); Almutarreb v. Bank of New York Trust Co., N.A., No. C 12–3061 EMC, 2012 WL 4371410 (N.D. Cal. Sept. 24, 2012).

Rather, the court of appeals reasoned that where the defect asserted would void the assignment – rather than make it merely voidable – a borrower retains standing to challenge an assignment of the borrower’s note and deed of trust. Turning to the question of whether the assignment was void (as opposed to voidable), the court of appeals concluded that, pursuant to New York trust law, a transfer to a securitized trust after the date of that trust’s closing rendered that transfer void.

As a result, the court of appeals held that Glaski had standing to challenge the subject foreclosure based on his factual allegations that the post-closing date attempts to transfer his deed of trust into the WaMu trust were void – notwithstanding that Glaski was neither a party to the trust agreement, nor alleged that he was a third party beneficiary thereof.

II. Sandri v. Capital One, N.A., et al. (In re Sandri), No. 12-3165DM, 2013 WL 5925655 (Bankr. N.D. Cal. Nov. 5, 2013)

Factual Background and Procedural History:

Similar to the facts in Glaski, chapter 13 debtor-plaintiff Cheryl Sandri executed a promissory note in favor of Chevy Chase Bank, F.S.B. (“Chevy Chase”) in late-2005. The loan was secured by a first priority deed of trust against Sandri’s residence. The deed of trust named Chevy Chase as the Lender and Trustee thereunder, and Mortgage Electronic Registration Systems, Inc. (“MERS”) as the “beneficiary” and nominee for the lender and lender’s successors and assigns.

After filing her bankruptcy case, Sandri commenced an adversary proceeding challenging defendants’ initiation of foreclosure proceedings against the subject property. Therein, Sandri alleged, among other things, that Chevy Chase’s securitization and assignment of her loan into the Chevy Chase Mortgage Funding LLC Mortgage–Backed Certificates, Series 2006–1 Trust was invalid because the attempted transfer took place after the closing of the trust, in violation of its pooling and servicing agreement.

In August 2013, the court heard defendants’ motion to dismiss Sandri’s complaint. After supplemental briefing addressing related case law, including the court of appeals’ Glaski decision, the Honorable Dennis Montali ultimately granted the motion to dismiss without leave to amend.

Holding and Analysis:

After a careful examination of the Glaski opinion and the U.S. Bankruptcy Appellate Panel’s (“BAP”) decision in Nordeen v. Bank of America, N.A. (In re Nordeen), 495 B.R. 468 (9th Cir. BAP 2013), the bankruptcy court declined to follow the Glaski ruling.

Observing that Glaski is an “outlier” case, Judge Montali noted that the majority of district courts in California have held that borrowers do not have standing to challenge the assignment of a loan because borrowers are not party to the assignment agreement (citing Aniel, supra, and Patel v. Mortgage Electronic Registration Systems, Inc., No. 4:13-cv-1874 KAW, 2013 WL 4029277 (N.D. Cal. Aug. 6, 2013), among other authorities). The bankruptcy court further noted that the Glaski court’s ruling flew in the face of other California appellate courts’ rulings which rejected standing claims similar to those asserted in Glaski. See, e.g., Siliga v. Mortgage Electronic Registration Systems, Inc., 219 Cal. App. 4th 75 (Cal. App. 2d Cir. 2013); Jenkins v. JP Morgan Chase Bank, N.A., 216 Cal. App. 4th 497 (Cal. App. 4th Dist. 2013).

Judge Montali also rejected the Glaski court’s interpretation of New York trust law, remarking that New York intermediate appellate courts have repeatedly and consistently found that an act in violation of a trust agreement is voidable, not void.

Finding the BAP’s Nordeen decision persuasive, as well as the weight of post-Glaski authorities addressing the issue, the bankruptcy court concluded that Sandri had failed to state a claim upon which relief could be granted, in part because Sandri did not have standing to enforce a pooling and servicing agreement to which she was neither a party nor a third party beneficiary.

Author’s Commentary:

Following Judge Montali’s holding in Sandri, other federal courts have soundly rejected Glaski‘s holding that a borrower retains standing to challenge foreclosure proceedings based on purported violations of a trust agreement to which that borrower is not a party or beneficiary. See, e.g., Scomparin v. Deutsche Bank Nat’l Trust Co., as Trustee, et al., No. 13–04054, 2014 WL 184175 (N.D. Cal. Jan. 15, 2014); Rivac v. NDEX West LLC, No. 13-1417 PJH, 2013 WL 6662762 (N.D. Cal. Dec. 17, 2013). As demonstrated by the Sandri decision and the thoughtful opinions which cite to it, practitioners should carefully examine whether their borrower clients actually have standing to assert wrongful foreclosure claims based on alleged breaches of a securitized trust’s pooling and servicing agreement, particularly where the subject transfer is merely voidable — and not void — in nature.

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When is a financing statement that is no longer effective, still effective? When it lapses in bankruptcy, of course!

October 8, 2014

Authored by:


The 11th circuit is becoming easier on lenders who forget to continue financing statements post-bankruptcy, thanks to a recent Middle District of Florida Bankruptcy Court ruling in March in the Colony Resort bankruptcy. In re Colony Beach & Tennis Club Association, Inc., Case No. 13-00348, Bankr. M.D. Fla. (March 21, 2014). Colony Resort is a development in Longboat Key on the Gulf of Mexico, built in 1973. The resort had fallen on hard times, due in large part to condominium owner refusals to pay assessments, which in turn prevented needed renovations. The resort closed in 2010, followed by the bankruptcy filings of the resort’s related entities.

The entity that ran the resort was Colony Beach and Tennis Club, Ltd (the “Club”). The Club’s primary asset is a potential recovery in a pending lawsuit against the home owners’ association (the “Association”) for refusing to pay assessments. The Club’s primary secured creditor is Colony Lender, LLC (“Colony”), which acquired the debt (now in the form of a foreclosure judgment) from Bank of America in 2010. Colony’s debt is secured by a lien on substantially all of the Club’s assets; it was perfected by a financing statement filed in 2005. Colony filed an amendment to the financing statement in 2010, but failed to continue the financing statement and so it lapsed in 2010.

The Association, as a creditor and interested party, was granted derivative standing to file a separate suit to determine the validity and extent of Colony’s secured claim in the Club’s bankruptcy case. In this suit, the Association contended that, by operation of 11 § U.S.C. 544(a), the post-petition lapse of Colony’s financing statement rendered Colony’s claim unsecured. The Association argued that the 2001 change in Article 9 of the Uniform Commercial Code in 2001 – the removal of the provision tolling the five year period of effectiveness of a financing statement during a bankruptcy case – rendered Colony’s claim unsecured. Colony argued that, as a general tenet of bankruptcy, the priority of liens is frozen in time as of the petition date.

The Court ruled that Colony’s lien was not extinguished upon lapse of the financing statement. The Court reasoned that while Section 679.515(3) of the Florida Statutes provides that a financing statement (and thus perfection) cease to be effective after lapse of the financing statement, “nowhere in the UCC is there a provision stating that upon lapse, the [underlying] lien is extinguished.” The court noted that “the cessation of perfection is a priorities issue – meaning that the security interest becomes vulnerable, from then on, to a loss of priority . . . [but] the automatic stay . . . will prevent holders of unperfected security interests and general unsecured creditors from filing or recording anything to jump ahead in priority.” Therefore, while Colony appears to have temporarily dodged a bullet here, the validity of its security interest is still subject to avoidance under 11 U.S.C. § 506(d) and is still vulnerable to later perfected junior security interests and judicial liens that don’t arise while the automatic stay is in place. Even though lenders may have been relieved by this ruling (at least somewhat), it is and always will be the best practice to timely continue financing statements post-petition. But if you forget, keep a copy of Colony Resort around the office, just in case.

…to be continued

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