Bankruptcy Archives - Page 6 of 7 - The National Law Forum

Tribal Corporate Bankruptcy Petition Raises Issues of First Impression for Bankruptcy Court

The National Law Review recently featured an article by Christine L. Swanick, Carren B. Shulman, and Wilda Wahpepah with Sheppard, Mullin, Richter & Hampton LLP regarding Tribal Bankruptcy Petitions:

On March 4, 2013, ‘SA’ NYU WA, Inc., a tribally-chartered corporation wholly owned by the Hualapai Indian Tribe, filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court, District of Arizona. This is a very important case for tribes and any party conducting business with tribes because the petition will raise a question of first impression for the Bankruptcy Court. The Bankruptcy Court will have to decide whether a tribal corporation is eligible to be a debtor under the Bankruptcy Code.

Federally recognized tribes likely are not eligible for bankruptcy protection. This is because Section 109 of the Bankruptcy Code provides direction as to who may be a debtor: only a “person” or a “municipality” may file a bankruptcy petition for relief. Neither “person” or “municipality,” as defined by the Bankruptcy Code, expressly includes or excludes an Indian tribe, and no reported court decisions have expressly addressed whether an Indian tribe is eligible to file for bankruptcy as person, municipality, or otherwise. The definition of “person” under the Bankruptcy Code excludes “governmental units” from being eligible debtors. The Bankruptcy Code defines a “governmental unit” as, among other things, an “other foreign or domestic government.” A number of courts have examined whether an Indian tribe is a “governmental unit” for purposes of applying the sovereign immunity provisions contained in Section 106 of the Bankruptcy Code. The majority of cases (including cases decided in the United States Bankruptcy Court for the District of Arizona) examining Section 106 of the Bankruptcy Code have found that an Indian tribe is a “governmental unit” within the meaning of the Bankruptcy Code. See In re Platinum Oil Properties, LLC, 465 B.R. 621 (Bankr. D.N.M. 2011) reconsideration denied, 11-09-10832 JA, 2011 WL 6293132 (Bankr. D.N.M. Dec. 12, 2011); Russell v. Ft. McDowell Yavapai Nation, 293 B.R. 34 (Bankr. D. Ariz. 2003); Davis Chevrolet Inc. v. Navajo Nation, 282 B.R. 674 (Bankr. D. Ariz. 2002); Turning Stone Casino v. Vianese, 195 B.R. 572 (Bankr. N.D.N.Y. 1995); Gilbert v. Shape, 25 B.R. 356 (Bankr. D. Mont. 1982); In re Sandmar Corp., 12 B.R. 910 (Bankr. N.M. 1981). Additionally, last year the United States Bankruptcy Court, Southern District of California dismissed a Chapter 11 petition filed by the Santa Ysabel Resort and Casino, a gaming enterprise of the Iipay Nation of Santa Ysabel, a federally recognized Indian tribe. The dismissal order of the Court simply granted the creditors’ motions to dismiss the petition.

However, in this case, the debtor alleges that it is a chartered tribal corporation, separate from the Hualapai Indian Tribe which owns it. The Bankruptcy Code allows a “corporation” to file for bankruptcy protection. The United States Bankruptcy Court, District of Arizona will have to decide whether a corporation organized under tribal law is a “corporation” for purposes of the Bankruptcy Code. In the non-bankruptcy context, the Seventh Circuit, in a case interpreting the federal Indian Gaming Regulatory Act and the federal diversity statute, 28 U.S.C. § 1332, held in Wells Fargo v. Lake of the Torches, 658 F.3d 684 (7th Cir. 2011), that a tribal corporation was a “corporation” and a citizen of the state of Wisconsin for purposes of determining federal diversity jurisdiction.

Outside of the bankruptcy context, federal and tribal law applicable to Indian tribes extends to a tribe’s wholly-owned instrumentalities and entities; however, whether the relief and remedies typically available with respect to non-tribal corporate debtors under the Bankruptcy Code is available to tribal corporate debtors, likely will be addressed by the Arizona bankruptcy court. For example, just as in the case of a tribe, land used or beneficially owned by a tribal corporation may actually be owned by the United States in trust for the tribe and therefore cannot be subject to sale or alienation in a bankruptcy case. Similarly, federal approvals may need to be obtained with respect to use or disposition of assets owned by a tribal corporation. If a tribal corporation is engaged in Indian gaming operations, which the debtor in the present case is not engaged in, federal law restricts the ownership of such gaming operations to the tribe on whose lands the tribal casino is located and requires third party managers to obtain federal approval.

The petition has the potential to make new law in other respects. For example, if a tribal corporation is found to be eligible as a debtor under the Bankruptcy Code, can creditors in future cases force tribal corporations into involuntary bankruptcy, despite the potential sovereign immunity of tribal corporations? If a tribal corporation is eligible as a debtor, can creditors “pierce” the corporate veil of the tribal corporation and reach assets of the shareholder tribe, or will the Bankruptcy Court follow non-recourse provisions that may be found in the tribal corporation’s organic documents or in its business contracts? Outside the context of bankruptcy, courts considering whether suits against a tribal corporate entity may also proceed against the parent tribe have declined to apply veil-piercing principles. See, e.g., Morgan Buildings & Spas, Inc. v. Iowa Tribe of Oklahoma d/b/a BKJ Solutions et al., Case No. CIV-09-730-M, 2011 WL 308889, *1 (Jan. 26, 2011 W.D. Okla.).

Given recent tribal defaults and restructurings, the outcome of this case will no doubt be watched by tribes and lenders to tribes.

Shawn Watts contributed to this article.

Private Equity Fund Is Not a “Trade or Business” Under ERISA

An article, Private Equity Fund Is Not a “Trade or Business” Under ERISA, written by Stanley F. Lechner of Morgan, Lewis & Bockius LLP was recently featured in The National Law Review:

District court decision refutes 2007 Pension Benefit Guaranty Corporation opinion letter and could provide potential clarity to private equity firms and private equity funds in determining how to structure their investments.

In a significant ruling that directly refutes a controversial 2007 opinion by the Pension Benefit Guaranty Corporation (PBGC) Appeals Board, the U.S. District Court for the District of Massachusetts held in Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund that a private equity fund is not a “trade or business” under the Employee Retirement Income Security Act (ERISA) and therefore is not jointly and severally liable for millions of dollars in pension withdrawal liability incurred by a portfolio company in which the private equity fund had a substantial investment.^[1] This ruling, if followed by other courts, will provide considerable clarity and relief to private equity funds that carefully structure their portfolios.

The Sun Capital Case

In Sun Capital, two private equity funds (Sun Fund III and Sun Fund IV) invested in a manufacturing company in 2006 through an affiliated subsidiary and obtained a 30% and 70% ownership interest, respectively, in the company. Two years after their investment, the company withdrew from a multiemployer pension plan in which it had participated and filed for protection under chapter 11 of the Bankruptcy Code. The pension fund assessed the company with withdrawal liability under section 4203 of ERISA in the amount of $4.5 million. In addition, the pension fund asserted that the two private equity funds were a joint venture or partnership under common control with the bankrupt company and thus were jointly and severally liable for the company’s withdrawal liability.

In response to the pension fund’s assessment, the private equity funds filed a lawsuit in federal district court in Massachusetts, seeking a declaratory judgment that, among other things, they were not an “employer” under section 4001(b)(1) of ERISA that could be liable for the bankrupt company’s pension withdrawal liability because they were neither (1) a “trade or business” nor (2) under “common control” with the bankrupt company.

Summary Judgment for the Private Equity Funds

After receiving cross-motions for summary judgment, the district court granted the private equity funds’ motion for summary judgment. In a lengthy and detailed written opinion, the court made three significant rulings.

First, the court held that the private equity funds were passive investors and not “trades or businesses” under common control with the bankrupt company and thus were not jointly and severally liable for the company’s withdrawal liability. In so holding, the court rejected a 2007 opinion letter of the PBGC Appeals Board, which had held that a private equity fund that owned a 96% interest in a company was a trade or business and was jointly and severally liable for unfunded employee benefit liabilities when the company’s single-employer pension plan terminated.

A fundamental difference between the legal reasoning of the court in the Sun Capital case compared to the reasoning of the PBGC in the 2007 opinion is the extent to which the actions of the private equity funds’ general partners were attributed to the private equity fund. In the PBGC opinion, the Appeals Board concluded that the private equity fund was not a “passive investor” because its agent, the fund’s general partner, was actively involved in the business activity of the company in which it invested and exercised control over the management of the company. In contrast, the court in Sun Capital stated that the PBGC Appeals Board “misunderstood the law of agency” and “incorrectly attributed the activity of the general partner to the investment fund.”^[2]

Second, in responding to what the court described as a “creative” but unpersuasive argument by the pension fund, the court concluded that the private equity funds did not incur partnership liability due to the fact that they were both members in the affiliated Delaware limited liability company (LLC) that the funds created to serve as the fund’s investment vehicle in purchasing the manufacturing company. Applying Delaware state law, the court stated that the private equity funds, as members of an LLC, were not personally liable for the liabilities of the LLC. Therefore, the court concluded that, even if the LLC bore any responsibility for the bankrupt company’s withdrawal liability, the private equity funds were not jointly and severally liable for such liability.

Third, the court held that, even though each of the private equity funds limited its investment in the manufacturing company to less than 80% (i.e., 30% for Fund III and 70% for Fund IV) in part to “minimize their exposure to potential future withdrawal liability,” this did not subject the private equity funds to withdrawal liability under the “evade or avoid” provisions of section 4212(c) of ERISA.^[3] Under section 4212(c) of ERISA, withdrawal liability could be incurred by an entity that engages in a transaction if “a principal purpose of [the] transaction is to evade or avoid liability” from a multiemployer pension plan. In so ruling, the court stated that the private equity funds had legitimate business reasons for limiting their investments to under 80% each and that it was not clear to the court that Congress intended the “evade or avoid” provisions of ERISA to apply to outside investors such as private equity funds.

Legal Context for the Court’s Ruling

Due to the distressed condition of many single-employer and multiemployer pension plans, the PBGC and many multiemployer pension plans are pursuing claims against solvent entities to satisfy unfunded benefit liabilities. For example, if a company files for bankruptcy and terminates its defined benefit pension plan, the PBGC generally will take over the plan and may file claims against the company’s corporate parents, affiliates, or investment funds that had a controlling interest in the company, or the PBGC will pursue claims against alleged alter egos, successor employers, or others for the unfunded benefit liabilities of the plan that the bankrupt company cannot satisfy.

Similarly, if a company contributes to a multiemployer pension plan and, for whatever reason, withdraws from the plan, the withdrawing company will be assessed “withdrawal liability” if the plan has unfunded vested benefits. In general, withdrawal liability consists of the employer’s pro rata share of any unfunded vested benefit liability of the multiemployer pension plan. If the withdrawing company is financially unable to pay the assessed withdrawal liability, the multiemployer plan may file claims against solvent entities pursuant to various legal theories, such as controlled group liability or successor liability, or may challenge transactions that have a principal purpose of “evading or avoiding” withdrawal liability.

Under ERISA, liability for unfunded or underfunded employee benefit plans is not limited to the employer that sponsors a single-employer plan and is not limited to the employer that contributes to a multiemployer pension plan. Instead, ERISA liability extends to all members of the employer’s “controlled group.” Members of an employer’s controlled group generally include those “trades or businesses” that are under “common control” with the employer. In parent-subsidiary controlled groups, for example, the parent company must own at least 80% of the subsidiary to be part of the controlled group. Under ERISA, being part of an employer’s controlled group is significant because all members of the controlled group are jointly and severally liable for the employee benefit liabilities that the company owes to an ERISA-covered plan.

Private Investment Funds as “Trades or Businesses”

Historically, private investment funds were not considered to be part of an employer’s controlled group because they were not considered to be a “trade or business.” Past rulings generally have supported the conclusion that a passive investment, such as through a private equity fund, is not a trade or business and therefore cannot be considered part of a controlled group.^[4]

In 2007, however, the Appeals Board of the PBGC issued a contrary opinion, concluding a private equity fund that invested in a company that eventually failed was a “trade or business” and therefore was jointly and severally liable for the unfunded employee benefit liabilities of the company’s defined benefit pension plan, which was terminated by the PBGC. Although the 2007 PBGC opinion letter was disputed by many practitioners, it was endorsed by at least one court.^[5]

The Palladium Capital Case

In Palladium Capital, a related group of companies participated in two multiemployer pension plans. The companies became insolvent, filed for bankruptcy, withdrew from the multiemployer pension plans, and were assessed more than $13 million in withdrawal liability. Unable to collect the withdrawal liability from the defunct companies, the pension plans initiated litigation against three private equity limited partnerships and a private equity firm that acted as an advisor to the limited partnerships. The three limited partnerships collectively owned more than 80% of the unrestricted shares of the defunct companies, although no single limited partnership owned more than 57%.

Based on the specific facts of the case, and relying in part on the PBGC’s 2007 opinion, the U.S. District Court for the Eastern District of Michigan denied the parties’ cross-motions for summary judgment. Among other things, the court stated that there were material facts in dispute over whether the three limited partnerships acted as a joint venture or partnership regarding their portfolio investments, whether the limited partnerships were passive investors or “investment plus” investors that actively and regularly exerted power and control over the financial and managerial activities of the portfolio companies, and whether the limited partnerships and their financial advisor were alter egos of the companies and jointly liable for the assessed withdrawal liability. Because there were genuine issues of material fact regarding each of these issues, the court denied each party’s motion for summary judgment.

Significance of the Sun Capital Decision

In concluding that a private equity fund is not a “trade or business,” the Sun Capital decision directly refutes the 2007 PBGC opinion letter and its reasoning. If the Sun Capital decision is followed by other courts, it will provide welcome clarity to private equity firms and private equity funds in determining how to structure their investments. Among other things, both private equity funds and defined benefit pension plans would benefit from knowing whether or under what circumstances a fund’s passive investment in a portfolio company can constitute a “trade or business” thus subjecting the private equity fund to potential controlled group liability. Similarly, both private equity firms and private equity funds need to know whether a court will attribute to the private equity fund the actions of a general partner or financial or management advisors in determining whether the investment fund is sufficiently and actively involved in the operations and management of a portfolio company to be considered a “trade or business.”

The Sun Capital decision was rendered, as noted above, against a backdrop in which the PBGC and underfunded pension plans are becoming more aggressive in pursuing new theories of liability against various solvent entities to collect substantial sums that are owed to the employee benefit plans by insolvent and bankrupt companies. Until the law becomes more developed and clear regarding the various theories of liability that are now being asserted against private equity funds investing in portfolio companies that are exposed to substantial employee benefits liability, it would be prudent for private equity firms and investment funds to do the following:

Structure carefully their operations and investment vehicles.
Be cautious in determining whether any particular fund should acquire a controlling interest in a portfolio company that faces substantial unfunded pension liability.
Ensure that the private equity fund is a passive investor and does not exercise “investment plus” power and influence over the operations and management of its portfolio companies.
Conduct thorough due diligence into the potential employee benefits liability of a portfolio company, including “hidden” liabilities, such as withdrawal liability, that generally do not appear on corporate balance sheets and financial statements.
Be aware of the risks in structuring a transaction in which an important objective is to elude withdrawal liability.

Similarly, until the law becomes more developed and clear, multiemployer pension plans may wish to devote particular attention to the nature and structure of both strategic and financial owners of the businesses that contribute to their plans and should weigh and balance the risks to which they are exposed by different ownership approaches.

_{[1]. Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, No. 10-10921-DPW, 2012 WL 5197117 (D. Mass. Oct. 18, 2012), available here.}

_{[2]. Sun Capital, slip op. at 17.}

_{[3]. Id. at 29-30.}

_{[4]. See e.g., Whipple v. Comm’r., 373 U.S. 193, 202 (1963).}

_{[5]. See, e.g., Bd. of Trs., Sheet Metal Workers’ Nat’l Pension Fund v. Palladium Equity Partners, LLC (Palladium Capital), 722 F. Supp. 2d 854 (E.D. Mich. 2010).}

Michigan’s Homestead-Exemption Law for Bankruptcy Debtors Upheld

The National Law Review recently published an article, Michigan’s Homestead-Exemption Law for Bankruptcy Debtors Upheld, by Stephen F. MacGuidwin of Varnum LLP:

A Michigan law that allows bankruptcy debtors to exempt up to $45,000 of the value of their home is valid under the U.S. Constitution, according to the recent decision of the U.S. Court of Appeals for the Sixth Circuit in Richardson v. Schafer (In re: Schafer), — F.3d—-, 2012 WL 3553294 (6th Cir. 2012). The decision resolves a split of authority that had developed between different decisions in the U.S. Bankruptcy Court for the Western District of Michigan.

Michigan law, as the Court explained, allows a debtor to choose her list of property exemptions from three sources: the federal Bankruptcy Code, 11 U.S.C. § 522(d); a Michigan law applicable only to bankruptcy debtors, M.C.L. § 600.5451; or (3) a Michigan law that applies to all Michigan residents (regardless of bankruptcy status), M.C.L. § 600.6023. As far as exempting the equity in a homestead, the Michigan law for bankruptcy debtors is the most generous, protecting up to $30,000 of the value of his homestead (or up to $45,000 if the debtors is disabled or at least 65 years old). This is significantly more than what is protected under the Bankruptcy Code ($21,625) or the Michigan general exemptions statute ($3,500).

In Schafer, the bankruptcy trustee challenged the $35,000 homestead exemption, arguing that the Michigan statute was unconstitutional under the Bankruptcy Clause and the Supremacy Clause of the U.S. Constitution. The bankruptcy court held that the statute was constitutional, but the U.S. Bankruptcy Appellate Panel of the Sixth Circuit reversed.

On appeal, the Sixth Circuit agreed with the State of Michigan, holding that the Michigan law did not violate the Bankruptcy Clause or the Supremacy Clause:

The Court rejected the argument that the Bankruptcy Clause endowed Congress with the exclusive authority to pass bankruptcy laws, reaffirming the concurrent authority shared between state and federal legislatures to promulgate bankruptcy laws. Where state laws are inconsistent with federal bankruptcy laws, the Supremacy Clause and pre-emption doctrines will invalidate those state laws.
The Court held that the Michigan act does not violate the “uniform Laws” phrase in the Bankruptcy Clause. Assuming that the phrase applies to state laws (and not just federal laws), the Michigan act operates uniformly because it provides a uniform process (as opposed to a uniform outcome).
Third, the Michigan act does not violate the Supremacy Clause, because there is no actual conflict between it and the Bankruptcy Code, because field pre-emption does not apply in the area of bankruptcy exemptions, and because the Michigan act “actually furthers, rather than frustrates, national bankruptcy policy.”

Underwater Condos – They Have Their Own Considerations Before Deciding on a Short Sale or Other Option

The Business Real Estate and Transactions Practice Group of Williams Kastner recently had an article about Underwater Condos published in The National Law Review:

A client recently brought to me a situation where his nephew’s new wife had purchased a condominium unit prior to their wedding. She financed the entire price with two mortgages and now it’s under water.

When advising owners of distressed properties it’s easy to begin with a discussion of the owner’s financial situation. Is this the only problem or are they bankruptcy candidates? Will the owner need credit in the near future for a job transfer or to finance a business?

With condos, my first questions go to the marketability of the unit:

What’s the owner occupancy ratio? Are we looking for a landlord or someone who wants to live there? Owner occupancy rates affect the availability and cost of financing as well as the type and number of willing buyers.
How healthy is the homeowners association? If owners have stopped paying their assessments the HOA could be under funded. This would discourage almost all buyers.
How well has the HOA planned for major repairs and capital improvements? Is there a reserve study? Will there be large special assessments in the coming years for roofing, painting, deck replacement, etc.?
Has the owner been paying their assessments? If not, will they be able to bring the assessments current at closing?

Many owners are unable to answer these questions because they stopped reading newsletters and minutes from the Board or going to owners meetings.

There are opportunities for investors and others in distressed properties. But, to help an owner, much of the craft is in knowing the questions that will quickly tell you what you’re dealing with. When it comes to condos, I want to know about the marketability of the unit before spending much time on the owner’s financial situation.

Club Membership Deposits in Bankruptcy

The National Law Review recently featured an article by the Hotels, Resorts & Clubs Group of Greenberg Traurig, LLP regarding Club Memberships and Bankruptcy:

As noted in our “Club Membership Deposits — From Gold to Paper” posted on August 4, 2011, many membership deposit clubs have resorted to bankruptcy to restructure their membership deposit debt liability. Below are descriptions of how the membership deposits have been restructured in four bankruptcies.

Dominion Club. Members will receive in full satisfaction of their membership deposit claims, distributions pro rata from an escrow account to be funded in part from future new membership sales proceeds and certain contributions from a club owner affiliate. Each member had the option to receive in lieu of distributions from the escrow account an upfront payment equal to 11% of the member’s membership deposit.

Amelia Island. The purchaser of the multiple golf course club and resort entered into a lease/purchase agreement with a club member entity with respect to one golf course and clubhouse. Members received in satisfaction of their membership deposit claims membership rights in the member owned club. Under the new Membership Plan, a golf member who converted to equity membership by paying $2,000 was to receive a refund of 30% of the membership deposit after resignation from available funds, increasing to 80% over a seven year period. Golf members who did not convert to equity membership were to receive a refund of 30% of their membership deposit after resignation from available funds.

Palmas del Mar. A government affiliated entity that acquired the club established a fund to pay, first, administrative claims and a tax claim, and then, if any amount remained, members would receive a pro rata share of the balance based on the present value of their membership deposit liability. It was expected that club members would be paid a very small percentage of their membership deposits.

PGA West. Membership deposits payable after resignation and reissuance will be paid at 50% of the total membership deposit; starting two years after the date of the reorganization plan, the refund percentage will increase by 5% each year. Members retain their right to 100% of their membership deposits at the end of 30 years and after death subject to annual caps on the total amount of payments under such provisions.

The individual circumstances for each club impacted the final provision governing the membership deposit restructure.

Membership deposits must be restructured so that members as a class of creditors vote in favor of the reorganization plan or the bankruptcy court determines that the reorganization plan does not unfairly discriminate and is fair and equitable. The club governing documents and the economics of the restructure must be carefully reviewed.

Second Circuit Finds Anderson News Pleading Is Plausible . . . Enough

The National Law Review recently featured an article, Second Circuit Finds Anderson News Pleading Is Plausible . . . Enough, written by Scott Martin, Simon Harms, Mary K. Marks, Scott Martin, Irving Scher, and Stephen C. Tupper of Greenberg Traurig, LLP:

Admonishing that motions to dismiss for failure to state a claim must be decided based on whethera plaintiff’s complaint is plausible rather than how plausible it is, which was the district’s view in granting a dismissal motion, the Second Circuit, in Anderson News, L.L.C. v. American Media, Inc.,^[1] declared improper the district court’s denial of leave to file a proposed amended complaint and vacated the dismissal.

Prior to its bankruptcy, Anderson News was the second largest wholesaler of magazines to newsstands and bookstores in the United States. Anderson alleged in a lawsuit against its major publisher suppliers that in response to a magazine distribution surcharge that Anderson another wholesaler (Source) had announced, the publishers conspired with Anderson’s competitors and distribution service companies to refuse to deal with the two wholesalers in order to drive them out of business Anderson claimed that the group boycott resulted in its loss of access to 80 percent of the magazines it distributed.

The District Court Decision

Judge Paul A. Crotty of the Southern District of New York dismissed Anderson’s original complaint under Fed. R. Civ. P. 12(b)(6), denied reconsideration, and refused leave to file a proposed amended complaint, finding the alleged conspiracy to be facially implausible under the Twombly-Iqbalstandard,^[2] and the original pleading’s defects incurable.^[3] Among other things, Judge Crotty commented that eliminating Anderson and Source would have left 90 percent of the wholesale market share in the hands of two competitors. Because publishers and distributors have an economic self-interest in having more, not fewer, wholesalers (since that yields greater competition, which is good for suppliers), Judge Crotty concluded that the conspiracy’s alleged goal was implausible. By contrast, he believed that parallel, but unilateral, conduct was “completely plausible” under the circumstances. Specifically, the defendants initially had different reactions to the surcharge; there was no direct evidence of conspiracy alleged in the original complaint; and the defendants’ decisions to not pay the surcharge and instead stop shipping to Anderson were “in line with a wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market.”^[4]

The district court concluded that Anderson’s allegations presented only “an economically implausible antitrust conspiracy” that was “based on sparse parallel conduct allegations” and lacked “a context suggesting a preceding agreement.”^[5]The district court further stated that while it was compelled to take “all factual allegations as true on a motion to dismiss, . . . factual inferences are not entitled to the same benefit.”^[6]

The Court of Appeals Decision

The Second Circuit reversed. While acknowledging that Twombly required “some factual context suggesting [that the parties] reached an agreement, not facts that would be merely consistent with an agreement,”^[7] the appellate court declared that it was not necessary for the plaintiff to show “that its allegations suggesting an agreement are more likely than not true or that they rule out the possibility of independent action, as would be required at later litigation stages such as a defense motion for summary judgment or a trial.”^[8] The Second Circuit emphasized that “a given set of actions may well be subject to diverging interpretations, each of which is plausible,” but the choice between such interpretations was for the fact-finder, not for the court to make on a Rule 12(b)(6) motion, “even if it strikes a savvy judge that actual proof of the facts alleged is improbable, and that a recovery is very remote and unlikely.”^[9] Unlike the Twombly complaint, however, Anderson’s proposed amended complaint did not rely solely on allegations of parallel conduct that was explicable as natural, unilateral reactions, but did, in fact, allege actual agreement — identifying dates, executives, and statements that could plausibly be interpreted as such. Ruling that these amendments would have stated a claim, the Second Circuit stressed that “[t]he plausibility standard is lower than a probability standard, and there may therefore be more than one plausible interpretation of a defendant’s words, gestures, or conduct.”^[10] In such circumstances, taking all facts as true and making all reasonable inferences, “on a Rule 12(b)(6) motion it is not the province of the court to dismiss the complaint on the basis of the court’s choice among plausible alternatives.”^[11]

Should We Discern A Trend?

In another recent Twombly-Iqbal decision, Liu v. AMERCO,^[12] the First Circuit was similarly permissive in applying the plausibility test, this time with respect to the required element of damages in a claim under the Massachusetts unfair trade practices statute (“Chapter 93A”). The plaintiff in Liu had brought a class action against the U-Haul truck rental companies premised upon a recent Federal Trade Commission investigation and consent order concerning an alleged invitation to collude by U-Haul to its major competitors (which as an attempt to conspire would not be actionable under Section 1 of the Sherman Act, but could be challenged under Section 5 of the FTC Act and,could potentially provide a basis for a claim, under Massachusetts’ Chapter 93A).

Although the plaintiff claimed to have undertaken two U-Haul rentals in or to Massachusetts, she did not plead specific facts concerning those transactions, such as what she paid or what competitors’ rates were at the time. The district court dismissed her complaint, explaining that basic facts about her individual transactions where necessary to judge whether she had overpaid, and whether such overpayment was caused by U-Haul’s unconsummated conspiracy attempt. The First Circuit, in an opinion by Judge Michael Boudin, disagreed, finding sufficient the plaintiff’s reliance, inter alia, upon the FTC complaint’s allegations (including references to specific documents) that U-Haul had raisedits own prices as an essential element of its effort to collude. Although the appellate court noted that “U-Haul’s brief raises fair questions about the power of the analysis,”^[13] it held, not unlike the Second Circuit in Anderson News, that “[t]he place to test factual assertions for deficiencies and against conflicting evidence is at summary judgment or trial.”^[14] Again, although the First Circuit appeared skeptical of the claim, it required that the complaint set forth “only enough facts to make the claim plausible, and at this stage reasonable inferences are taken in favor of the pleader.”^[15]

Author’s note: Several years ago, while participating on a panel not long after the Supreme Court decided Twombly, I was greeted with skepticism (to put it politely) when arguing that it would not be an extraordinary extension of the then-new pleading standard to require that a complaint alleging an agreement in restraint of trade set forth facts that, if true and allowing for all reasonable inferences in the plaintiff’s favor, stated a claim that was more plausibly consistent with conspiracy than with competition. After all, that would be a logical application of the summary judgment standard of Matsushita^[16] — a decision that likewise is framed around notions of plausibility and economically rational behavior — in the pleading context: i.e., if the record were to develop consistent with plaintiff’s pleading, would it “tend to exclude the possibility” of independent, non-collusive action?^[17] It would also respond to concerns expressed by the Supreme Court that even under the old Conley v. Gibson^[18] “plaintiff can prove no set of facts” pleading standard in itsAssociated General Contractors^[19] decision, a district court served an important gatekeeping role at the pleading stage in antitrust cases due to the significant expense of discovery.^[20] From the perspective of this (principally defense) antitrust litigator, Judge Crotty’s approach in Anderson Newswas not unwelcome. For the time being, though, at least in the Second Circuit, it is not the law.

_{[1] ___ F.3d ___ (2d Cir. April 3, 2012). The decision is available on Westlaw at 2012 WL 1085948.}

_{[2] See Ashcroft v. Iqbal, ___ U.S. ___, 129 S. Ct. 1937 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).}

_{[3] Anderson News, L.L.C. v. Am. Media, Inc., 732 F. Supp. 2d 389 (S.D.N.Y. 2010).}

_{[4] Id. at 397-99.}

_{[5] Id. at 402.}

_{[6] Id. (emphasis added).}

_{[7] Anderson, 2012 WL 1085948, at *18 (internal quotations omitted).}

_[8] Id.

_{[9] Id. at *18-19 (internal quotation marks and citations omitted).}

_{[10] Id. at *24.}

_[11] Id.

_{[12] F.3d ___ (1st Cir. May 4, 2012) (Boudin, J.). The decision is available on Westlaw at 2012 WL 1560170.}

_{[13] Id. at *6.}

_[14] Id.

_{[15] Id. (citing SEC v. Tambone, 597 F.3d 436, 441 (1st Cir. 2010)).}

_{[16] Matsushita Elec .Indus. Co. v. Zenith Radio, 475 U.S. 574 (1986).}

_{[17] See id. at 588 (internal quotations omitted).}

_{[18] 355 U.S. 41 (1957).}

_{[19] Assoc. Gen. Contractors of Cal., Inc. v. Carpenters, 459 U.S. 519 (1983).}

_{[20] See id. at 528 n.17 (“a district court must retain the power to insist upon some specificity in pleading before allowing a potentially massive factual controversy to proceed”).}

Michigan Court of Appeals Issues Opinion Affecting Mortgages Foreclosed by Advertisement

The National Law Review published an article by Randall J. Groendyk of Varnum LLP regarding Mortgage Foreclosures:

The Michigan Court of Appeals has issued important opinion affecting foreclosure of mortgages by advertisement.

Michigan law prohibits starting a foreclosure by advertisement if a lawsuit has already been filed to recover payment of “the debt” secured by the mortgage. Many have understood this law to mean that while a mortgagee may not file a lawsuit to recover a debt secured by a mortgage and at the same time foreclose the mortgage by advertisement, the mortgagee could simultaneously file a lawsuit against a guarantor based on a guaranty of the debt while at the same time foreclosing the mortgage by advertisement. However, the recent Court of Appeals decision held that a bank could not foreclose by advertisement on a mortgage when at the same time it had filed suit against a guarantor.

The Court based its decision on the fact that the underlying loan documents contained language which defined “the debt” to include any guarantees, and held the bank violated Michigan law by foreclosing the mortgage by advertisement at the same time it was suing the guarantors. The Court looked at the entire loan package, and not just the mortgage to reach its decision. As a result, the Court held that the bank could not proceed with the foreclosure by advertisement. Under the Court’s ruling, mortgagees may not foreclose a mortgage by advertisement while at the same time filing suit against guarantors.

FTC Obtains Injunction, Asset Freeze on Alleged Mortgage Scam

The National Law Review recently published an article by Steven Eichorn of Ifrah Law regarding a Recent FTC Injunction:

The Federal Trade Commission has obtained an order from the federal court for the Central District of California for a preliminary injunction and asset freeze against all the defendants in an alleged mortgage modification scam.

The complaint was filed against California-based Sameer Lakhany and a number of related corporate entities for violating the Federal Trade Commission Act and the Mortgage Assistance Relief Services Rule, now known as Regulation O.This was the first FTC complaint against a mortgage relief scheme that falsely promised to get help for homeowners who joined with other homeowners to file so-called “mass joinder” lawsuits against their lenders.

The complaint listed two separate alleged schemes that collected over $1 million in fees and used images of President Obama to urge consumers to call for modifications under the “Obama Loan Modification Programs.”

The first scheme was a loan modification plan under which the defendants allegedly promised substantial relief to unwary homeowners from unaffordable mortgages and foreclosures. Their website featured a seal indicating that it was an “NHLA accredited mortgage advocate” and that NHLA is “a regulatory body in the loan modification industry to insure only the highest standards and practices are being performed. They have an A rating with the BBB.” Unfortunately, the NHLA is not a “regulatory body” and it actually has an “F” rating with the BBB.

The defendants reinforced their sales pitch by portraying themselves as nonprofit housing counselors that received outside funding for all their operating costs, except for a “forensic loan audit” fee. According to the FTC, the defendants told consumers that these audits would uncover lender violations 90 percent of the time or more and that the violations would provide leverage over their lenders and force the lenders to grant a loan modification. The defendants typically charged consumers between $795 and $1595 for this “audit.” Also, if the “audit” did not turn up any violations, the consumers could get a 70 percent refund. Unfortunately, there were often no violations found, any “violations” did not materially change the lender’s position, and it was nearly impossible to actually get a refund for this fee.

The second alleged scheme was that the defendants created a law firm, Precision Law Center, and attempted to sell consumers legal services. Precision Law Center was supposed to be a “full service law firm”, with a wide variety of practice areas. It even claimed to “have assembled an aggressive and talented team of litigators to address the lenders in a Court of Law.” However, the FTC charged that the firm never did anything besides for filing a few complaints, which were mostly dismissed.

To assist Precision Law Center in getting new clients, the defendants sent out direct mail from their law firm that resembled a class action settlement notice. The notice “promised” consumers that if they sued their lenders along with other homeowners in a “mass joinder” lawsuit, they could obtain favorable mortgage concessions from their lenders or stop the foreclosure process. The fee to participate in this lawsuit was usually between $6,000 to $10,000. The material also allegedly claimed that 80 to 85 percent of these suits are successful and that consumers might also receive their homes free and clear and be refunded all other charges.

The defendants’ direct mail solicitation also contained an official-looking form designed to mimic a federal tax form or class action settlement notice. It had prominent markings urging the time sensitivity of the materials and it requested an immediate response.

Obviously, these defendants employed many egregious marketing techniques that crossed the FTC’s line of permissibility. However, in light of the FTC’s renewed focus on Internet marketing, even a traditional marketing campaign should be carefully crafted with legal ramifications in mind.

As a final note, it is always smart not to antagonize the FTC by proclaiming (like the defendants here did) that they are “Allowed to Accept Retainer Fees” because it was “Not covered by FTC.” We couldn’t think of a better way to get onto the FTC’s radar screen!

The BankAtlantic Bancorp Decision — Roadblock or Detour to Open Bank Sale of Distressed Banks?

Recently The National Law Review published an article regarding The Bank Atlantic Bancorp Decision written by The Financial Institutions Group of Schiff Hardin LLP :

Any bank holding company with trust preferred securities (“TRuPs”) outstanding and in need of capital in this stressed operating environment for banks has had its strategic options limited by a recent decision of the Delaware Chancery Court. The court’s opinion makes it more difficult to recapitalize a distressed bank by giving the TRuPs bondholders enhanced blocking power. This newsletter summarizes the recent court action, explains its implications for bank recapitalizations, and offers the strategic solution of a Bankruptcy Code Section 363 sale to address capital needs while reconciling the rights and remedies of TRuPs trustees and bondholders.

The February 27, 2012 decision of the Delaware Court of Chancery to permanently enjoin the proposed sale of the stock in a financially distressed bank as “substantially all of the assets” of a savings bank holding company in violation of several indentures for outstanding issues of TRuPS offers many lessons for boards of directors, CEOs, investment bankers and lawyers dealing with the recapitalization or sale of distressed banks. In re BankAtlantic Bancorp, Inc. Litigation, Slip. Op. Consol. C.A. No. 7068 VCL (Del. Ch. February 27, 2012). Vice Chancellor Laster held that the sale met both tests for a sale of substantially all of a corporation’s assets. It met the quantitative test because the $306 million book value of the common stock in BankAtlantic, a federal savings bank (“Bank”) constituted approximately 90% of the $341 million book value of all assets of BankAtlantic Bancorp (“Holdco”) and the bank accounted for 69% of consolidated revenues and Holdco’s principal source of liquidity. The sale likewise met the qualitative test because Holdco’s public filings referred to itself as a “unitary savings bank holding company,” which was contractually bound not to compete with the buyer of Bank and owned no other subsidiaries other than a workout subsidiary to warehouse nonperforming assets. The plaintiffs were entitled to enjoin the transaction because the TRuPS trustees and holders would have been irreparably injured by the transfer of the Bank stock that left Holdco without sufficient liquid assets to pay the accelerated TRuPS.

The transaction and its context

The transaction culminated a series of efforts by Holdco to escape from $630 million in losses during 2008-2010 from commercial real estate loans in South Florida. Bank was blocked from paying dividends or upstreaming assets under a cease and desist order. Bank had raised some cash from a branch sale transaction in 2011 after a prior unsuccessful sales effort. Holdco tried unsuccessfully to raise equity capital and floated three partially subscribed rights offerings during 2009-2011. Holdco and its principals lost a summary judgment and a jury verdict for securities fraud in part of a class action about misstatement of loan losses. Finally, 11 issues of TRuPS, aggregating $25 million principal amount had been placed on interest deferral since early 2009. While Holdco was not formally insolvent or in capital violation under its cease and desist order, the accrual of deferred interest on the TRuPS increased the debt to $322 million by 2011 and a projected $368 million by 2013.

The court found that Holdco ran a sales process, but its controlling stockholders rejected every structure other than the transaction selected. One buyer expressed interest in a cash purchase of Bank for $158 million but cut its bid to $50 million after the securities fraud verdict was entered against Holdco. Instead, Holdco opted for a sale of its stock in Bank in an innovative transaction that involved no cash payment from the buyer, BB&T, other than a $10 million payment for a covenant not to compete from Holdco’s insiders. The transaction offered a 10% premium over deposits for the Bank stock, because BB&T would assume $3.4 billion in liabilities (principally to depositors) but only purchase $3.1 billion in assets. To adjust its balance sheet for closing, Bank planned to drop cash and nonperforming and criticized assets with a book value of $623.6 million into a new subsidiary named Retained Asset LLC (“Residco”). At closing, the membership interest in Residco would be distributed by Bank to Holdco. Residco was projected to generate $14 million in annual interest income, but Holdco’s annual expenses, including TRuPS interest, topped $30 million. To obtain regulatory approval, BB&T agreed to recapitalize Bank after closing with $538.8 million to fill the capital hole left by the creation of Residco and achieve a 6.84% ratio of tangible common equity to tangible assets).

One of Holdco’s investment banks called BB&T’s recapitalization the “purchase price” of the transaction, in effect satisfying the contingent liability that took the form of the amount of new capital necessary to meet ongoing capital requirements. Its other investment banker issued a fairness opinion that the book value of the membership interest in Residco was a fair purchase price. In either event, Holdco’s pro forma balance sheet after closing would improve by over $300 million and current deferred interest on the TRuPS would be paid. Holdco’s stock jumped 111% while one publicly traded issue of TRuPS rose 99.5% in value. Nevertheless, several TRuPS trustees and holders (including several activist secondary buyers) filed suit, perhaps because the transaction did not even generate cash sufficient to match Holdco’s prior offer to purchase the TRuPS for twenty cents on the dollar in early 2010.

What constitutes “substantially all of the assets” of a single bank holding company?

The plaintiffs successfully interrupted the transaction by enforcing a common “boilerplate” provision that appears in all of Holdco’s TRuPS indentures. The indentures allow acceleration of the TRuPS upon the sale of “substantially all of the assets” of Holdco unless the buyer assumes the indenture. Under established New York law, which each underwriter provided was to govern, the court applied both a “quantitative” and a “qualitative” test of what constitutes “substantially all of the assets.” Even if the seller retains assets making up most of its book value, the sale of the crown jewels of a company can trigger the qualitative test by fundamentally changing the nature or character of the seller’s business.

The court held that the transaction met both tests. The transaction satisfied the qualitative test because Holdco sold its sole banking subsidiary, which generated the dominant share of revenues, provided all of Holdco’s liquidity and cash flow and employed almost all of the employees of the combined enterprise. Holdco’s business was fundamentally changed by the transaction because it was contractually bound not to compete with the buyer in the banking business. The court also found that the quantitative test was satisfied because the book value of the Bank stock (the $306 million) constituted 90% of the book value of Holdco’s assets ($341 million). The court rejected Holdco’s argument that the Bank stock had no value. Holdco argued that the book value of Residco (which was stripped out of Bank at closing) should be deducted from the book value of the Bank stock, leaving a “negative book value” of over $300 million. The court found this counter-intuitive because BB&T was buying the “good bank” and leaving behind the “bad bank.” Evidence of the positive value of Bank was the fairness opinion of one of Holdco’s investment bankers, which pointed out that BB&T thought that Bank’s franchise was worth enough to justify a $538.8 million post-closing investment to recapitalize it.

The court also rejected Holdco’s “valueless stock” argument because New York excluded the buyer’s purchase price from the total assets of the seller in determining whether the seller sold “substantially all” of such assets. The court pointed to statements by Holdco’s insiders that the membership interest in Residco was the “purchase price.” One of Holdco’s investment bankers opined that Holdco received a fair price equal to 166% price-to-book ratio calculated by dividing the book value of Residco by the book value of the Bank stock ($607/306 million). Indeed, the court observed that no transaction would meet the “substantially all of the assets” test if the seller’s assets were grossed up by the purchase price paid.

Availability of Injunctive Relief

The court granted the plaintiffs’ request for a permanent injunction against the transaction because it held that they would be irreparably harmed. Even though the TRuPS would receive $39 million to pay down deferred interest, Holdco lacked the liquidity to pay the remaining $290 million that would be due on the acceleration of the TRuPS. Holdco would have had no assets to pay the TRuPS except a “fire sale” of the assets of Residco that would have been “suicide” according to Holdco’s principal stockholder. The court also believed that the $10 million to be paid to senior executives and shareholders in new severance and non-compete agreements violated the established liquidation rules giving creditors priority over shareholders. It also pointed to New York law holding that creditors are irreparably injured by transferring all collectible assets, which fundamentally shifts the risks that creditors agreed to assume.

The court rejected the view that an “untenable” status quo made the balance of hardships favor Holdco. While the court noted that there was a risk that Holdco would fail, it pointed to the fact that Holdco was not presently insolvent or in violation of its capital requirements, particularly because the TRuPS still counted as Tier I capital for Bank. It seemed particularly concerned with flaws in Holdco’s sales process whereby the controlling shareholder frustrated other alternatives to the transaction by misstatements to the board and the frustration of other bidders. Even though the only bid on the table offered just $50 million, the court believed that it might have been superior to the creditors if the TRuPS had been assumed. In essence, Holdco never made a case that such a transaction was impossible.

Post-Litigation Settlement

Two weeks after the decision in the BankAtlantic litigation, BB&T and Holdco revised the transaction to include the assumption of the TRuPS. BB&T protected its investment, however, by its simultaneous acquisition of a 95% preferred membership interest in an LLC to be formed to hold $424 million in loans and $17 million in real estate and associated deposits, escrows, rights, obligations, loss reserves and claims (presumably the bulk of the assets that BB&T previously agreed to leave behind in Residco). BB&T’s preferred interest will terminate when it receives a preferred amount of distributions equal to the additional $285 million investment that it made by assuming the TRuPS indentures. Finally, BB&T received Holdco’s guaranty of the preferred amount of distributions. The legal fees of the TRuPS trustees in the BankAtlantic litigation will be paid from the transaction. In sum, the TRuPS holders received exactly what they wanted.

Lessons Learned

The BankAtlantic litigation shows a number of developments in the distressed, open-bank arena:

The terms of TRuPS indentures can impede an open-bank sale even if the sale improves the holding company balance sheet, pays deferred interest and offers the prospect of full payment to creditors and value to shareholders. Most distressed bank situations do not offer such advantages to holding company creditors and shareholders.
TRuPS holders have become better organized and are able to persuade or direct trustees to take legal action to contest transactions. The ruling in the BankAtlantic litigation will encourage more aggressive litigation in the future.
Analogous events of default allow acceleration of secured and unsecured bank loans to bank holding companies.
Courts will closely scrutinize the marketing process where a seller restricts bidders to a structure that benefits insiders and does not allow all bidders reasonable due diligence.
Non-bankruptcy courts may not give much weight to the difficult regulatory and economic environment for open-bank sales of financially distressed banks.
To be persuasive, the investment bankers’ fairness opinions must pass the common-sense test, even in a transaction that positively benefits creditors.

Would a Bankruptcy Court have approved the Original Transaction as a Section 363 Sale of Holdco’s stock in Bank?

The court’s ruling suggests that Holdco may have had a more favorable outcome if it had structured the original transaction to close in a Section 363 sale of assets in a Chapter 11 proceeding. See Fisher, J.M., Bankruptcy Sales to Facilitate Open-Bank Recapitalizations, Pratt’s Journal of Bankruptcy Law (January 2011) at 64. Bankruptcy courts are more familiar with the practical exigencies of selling financially distressed businesses, a point that the Chancery Court discounted. These include the need for a speedy sale and the fact that creditors may have to wait to be paid and be satisfied with a partial payment of their claims. In essence, the BB&T bid could have been signed up with the contingency that the bankruptcy court (i) approve bidding procedures setting a marketing period for higher and better bids for a reasonable but brief period after the bankruptcy and giving BB&T a breakup fee as compensation for being the stalking horse, (ii) allow other bidders to compete against the price and structure of the stalking horse bid so long as the other bidder had comparable financial qualifications, due diligence and financing contingencies, if any, and comparable ability to obtain regulatory approval, and (iii) approve the sale to the highest and best bid based on the values received by Holdco’s creditors with due regard to the urgent risk of regulatory action.

A bankruptcy would involve several key differences in the judicial process:

The existence of a default and acceleration under the TRuPS indentures would be irrelevant because the automatic stay prohibits the TRuPS trustees from exercising remedies.
Bankruptcy courts are comfortable with a stalking horse process, particularly where there has been substantial pre-bankruptcy marketing.
All constituencies, including TRuPS and shareholders, have input into the judicial process approving bidding procedures that test the stalking horse bid and ultimate fairness of the value provided to holding company stakeholders.
Bankruptcy courts are accustomed to considering valuation testimony as well as treating the judicially approved auction result as the “market” value.
The $626 million value of the Residco membership interest would have been considered a substantial purchase price to be balanced against the investment banker’s valuation of the BankAtlantic stock. The “book value” of the Bank stock likely would have been viewed as inflated, in light of the value of Residco and the large investment that BB&T was required to make to recapitalize Bank after closing.
A fair auction process and the protections afforded a buyer under Section 363 might have induced competitive bidding by the other interested party and likely captured the proposed noncompete payment from BBT to insiders for the benefit of creditors.
The holding company could have taken its time, protected by the automatic stay or a discharge, in working out the nonperforming assets in Residco.
The holding company might have been able to preserve valuable tax attributes through a plan of reorganization.

Even though the matter appears to be settled, the BankAtlantic decision suggests a change in the landscape for the open-bank sale of a financially distressed bank and a possible detour through bankruptcy that can level the playing field for all stakeholders.

DOJ Goes After Smaller Fraudsters, Lets Big Fish Escape

An article featured recently in The National Law Review regarding the Department of Justice’s Prosecuting Fraud was written by Nicole Kardell of Ifrah Law:

Successful criminal prosecutions of mortgage fraud seem to have one thing in common: a fraud figure well below $10 million. One of the recent cases that generated a fair amount of press involved the convictions of co-conspirators in a mortgage scheme carried out by an ex-NFL player. That scheme, which took place during the housing boom in the early 2000’s, resulted in 10 convictions. Former Dallas Cowboy linebacker Eugene Lockhart is facing jail time of up to 10 years. The nine other individuals are looking at sentences of roughly two to five years.

The mortgage scheme – which led to convictions for wire fraud, conspiracy to commit wire fraud, and making false statements to a federal agency – seems pretty typical of the conduct that prosecutors have been going after: the use of “straw borrowers” to apply for loans on home purchases; falsification of data on loan applications to ensure that straw borrowers would qualify for home loans; and creation of artificially high appraisal values for the homes to be purchased by the straw borrowers. In the case of Lockhart and his cohorts, the Justice Department alleges that the scheme resulted in an actual loss to lenders of roughly $3 million.

While $3 million is not a trivial sum, it is a very tiny portion of the housing industry. Even the total amount in all similar prosecutions nationwide is quite small. Recent headline prosecutions involving similar schemes include a Florida case valued at $8 million in loan proceeds, an Alabama case valued at $2 million, and a New York case valued at $82 million in loan proceeds. At least the latter is a more aggressive number (as apparently was one of the defendants in the New York case, who moonlighted as a dominatrix in a Manhattan club).

The government has been touting these prosecutions as a part of a major crackdown on the mortgage business. The DOJ press statements note that“[m]ortgage fraud is a major focus of President Barack Obama’s Financial Fraud Enforcement Task Force.” But these are comparatively minor matters if one looks to the real causes of the housing crash that led to the 2008 financial crisis. Bank of America, Goldman Sachs, JPMorgan Chase, and Wells Fargo, who were all in the business of packaging and selling subprime mortgages, have been more or less covered with Teflon.

The lack of criminal prosecutions against the big banks in the subprime crisis has been written about many times. But that doesn’t mean it’s not worth repeating. Something seems just wrong about the DOJ’s focus on the smaller fraudsters and its soft approach to the bigger players.

Hopefully, the SEC’s recent decision to send Wells notices to Goldman Sachs, JPMorgan Chase, and Wells Fargo indicating possible enforcement proceedings, means that at least these banks could face some civil liability for their role in the housing crash. And Bank of America recently settled a False Claims Act case with the Feds for $1 billion. But approaching the banks with civil actions, and skirting individual culpability, sends the message that once you reach a certain level of success, you are above the law.

Category: Bankruptcy

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