Supreme Court Broadens the Types of Federal Agency Actions That Can Be Challenged in Court

Recently an article by Jerry Stouck and David B. Weinstein of Greenberg Traurig, LLP regarding the Types of Federal Agency Actions that can be Challenged in Court was published in The National Law Review:

GT Law

The Supreme Court recently held, in Sackett v. Environmental Protection Agency, that “compliance orders” unilaterally issued by the EPA, which the agency contended were informal directives not subject to judicial review, qualify as “final” agency actions that can be challenged in court under the Administrative Procedure Act (APA). The decision is not limited to EPA compliance orders, although many hundreds of those are issued each year, which now will be subject to judicial review. Sackett applies more broadly because it expands the types of federal agency actions that will be deemed final, and thus subject to judicial challenge, under the APA. Any agency action that has coercive legal effect, and no established avenue for agency-level review, is now potentially challengeable under Sackett.

The APA authorizes federal courts to enjoin or set aside agency action that is arbitrary, capricious, or contrary to law, and to compel agency action unlawfully withheld or unreasonably delayed. In any such case, however, it is a jurisdictional requirement that the agency action be “final.” The rationale is that courts should not interfere with ongoing agency decision-making. Such finality is relatively clear when a party challenges a regulation or an order resulting from formal agency adjudications (e.g., license or permit proceedings). But most actions of federal regulatory agencies fall into neither category, and instead constitute what practitioners call “informal” agency adjudication. EPA compliance orders are in that category; they do not result from any well-defined agency proceeding. So are many other types of agency directives and procedures.

Sackett involved a couple who, in the course of developing a residential lot they owned into a home site, filled in part of the lot with dirt and rock. Unbeknownst to the Sacketts, their lot contained wetlands that the EPA considered to be within federal regulatory jurisdiction under the Clean Water Act (CWA). If that were true, the Sacketts could not lawfully fill the wetlands without a federal permit. The EPA issued a compliance order containing “Findings and Conclusions” that the lot did in fact contain wetlands subject to EPA jurisdiction. The order also directed the Sacketts to restore the lot in accordance with an EPA work plan and to provide EPA with access to the lot and to records concerning conditions at the lot.

The Sacketts, who believed their lot did not contain wetlands subject to the CWA, requested a hearing before the EPA, which the agency refused to provide. The Sacketts then filed suit, but the lower courts dismissed it, finding that the compliance order did not qualify as final agency action under the APA. Thus, the Sacketts were unable to initiate a judicial proceeding to resolve the dispute over whether their wetlands were subject to the CWA. But if the EPA later went to court to enforce its compliance order, the government contended that statutory per-day penalties owing from the Sacketts would double, and that obtaining a necessary permit would be more onerous under applicable regulations. In essence, therefore, the EPA compliance order was coercive — if the Sacketts “voluntarily” complied with the order, they would avoid the double penalties and the additional permitting requirements.

That coercive effect was central to the Supreme Court’s reasoning in holding that the compliance order was a final agency action, subject to judicial review. The coercive effect of the EPA compliance order in Sackett is also what makes the decision potentially applicable to other, similarly-coercive agency directives and procedures. Under the test articulated by the Court in a 1997 decision, Bennett v. Spear, agency action is “final” for APA purposes if it both “determines rights and obligations” and marks the “consummation” of the agency’s decision-making process. The Court in Sackett found the former requirement satisfied because “legal consequences” flowed from the compliance order, i.e., the doubling of the statutory penalties and tightening of the wetlands permitting requirements. The government contended, however, that even though the EPA refused the Sacketts’ request for a hearing, the compliance order was not the end of the Agency’s decision-making process. The government pointed to a portion of the order that invited the Sacketts to “engage in informal discussion” with the EPA regarding the order’s terms and requirements and/or any allegations in the order that they believed to be inaccurate. The Court rejected this argument, and found the compliance order sufficiently final, because it conferred no “entitlement” to further Agency review. The Court concluded that the “mere possibility” that an agency might reconsider as a result of informal discussions “does not suffice to make an otherwise final agency action nonfinal.”

Underlying the Sackett decision is a concern, expressly noted by the Court, that agencies should not be allowed to “strong-arm . . . regulated parties into ‘voluntary compliance’ without the opportunity for judicial review.” When regulated parties face such strong-arming at the hands of federal agencies they should now consider whether, pursuant to Sackett, judicial redress is available under the APA.

Retail Law Conference 2012

The National Law Review is pleased to bring you information about the upcoming Retail Law Conference:

at the Westin Galleria in Dallas, Texas

November 7-9, 2012

This event is the perfect opportunity to discuss the latest issues affecting the retail industry while obtaining important continuing legal education (CLE) credits.

Open to retail and consumer product general counsel, senior legal executives and in-house attorneys and their teams, the exceptional dialogue presented at this conference will help your organization navigate the current legal landscape of the industry.

The Batching Games: ICANN’s Plan to Process New gTLD Applications

The National Law Review recently published an article by Jamison B. Arterton of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. regarding ICANN’s gTLD Applications process:

On March 29, 2012, the user registration window closed for anyone planning to apply for a new generic top level domain (gTLD). Applicants who registered prior to March 29, 2012, however, still have until April 12, 2012 to complete their application. As of March 25th, ICANN had 839 registered users in the system. Given the number of registered users, ICANN has announced that if it receives significantly more than 500 applications, it will begin processing those applications in batches. Under this “batching process,” applications will be divided into groups of 500 applications to be evaluated at a time.

If batching is required, applicants will need to obtain a time-stamp through the designation process that will begin after the April 12th close of the application submission period. Applications will be batched and reviewed according to this time-stamp and not based on when the application was actually received.(gTLD). Applicants who registered prior to March 29, 2012, however, still have until April 12, 2012 to complete their application. As of March 25th, ICANN had 839 registered users in the system. Given the number of registered users, ICANN has announced that if it receives significantly more than 500 applications, it will begin processing those applications in batches. Under this “batching process,” applications will be divided into groups of 500 applications to be evaluated at a time.

Now for the fun part. If the batching process is activated, applicants will be notified that they are required to select a future time target for the processing of their application. On the date and time selected, the applicant must return to the online system and click “submit” as close as possible to the selected time as possible. How close the applicant comes to the their target time will determine the applicant’s batch placement. ICANN refers to this as “a game of digital archery.” What fun! All this for $185,000 filing fee. Applicants who do not have a preference for when their application is processed can affirmatively opt-out of the process.

In the event that more than one applicant applies for a similar top-level domain, all applications for the contending strings will be placed into the earliest batch designated. If batching is necessary, ICANN has indicated that it will post a video demonstration of the batching process after the close of the application process. For now, additional information about the batching process can be found at ICANN’s website under “Batching Basics” (click here).

8th Annual FCPA & Anti-Corruption Compliance Conference

The National Law Review is pleased to bring you information about the upcoming 8th FCPA & Anti-Corruption Compliance Conference:

8th FCPA and Anti-Corruption Compliance Conference
Identifying Changes to the Global Anti-Corruption Compliance Landscape to Maintain and Upgrade Your Existing Compliance Program

Event Date: 12-14 Jun 2012
Location: Washington, DC, USA

Beyond dealing with the FCPA and UK Bribery Act, there are upcoming changes to global Anti-Compliance initiatives being enacted by other major countries. It is imperative that organizations are made aware of these new rules and regulations to be able to meld them all into their organization’s anti-corruption compliance program. Maintaining a robust global compliance program along with performing proper and detailed 3^rd party due diligence is of the upmost importance.

Marcus Evans invites you to attend our 8^th Annual Anti-Corruption & FCPA Conference. Hear from leading executives within various industries on how to identify new areas of concern when dealing with bribery or working within a company to update an anti-corruption compliance program.

Attending this event will allow you to learn how to mitigate the effects of any possible instances of corruption and bribery both at home and abroad. Discuss solutions and best practices that companies have found when dealing with their anti-corruption compliance programs. This conference will not only review the newest enforcement cases, but also highlight practical solutions to problems dealing with FCPA and global anti-corruption measures.

Attending this conference will allow you to:

-Overcome the issues in dealing and conducting an internal investigation with Dell
-Identify anti-corruption liability concerns for US companies when engaging in Joint Ventures and Mergers and Acquisitions with Crane Co.
-Perform anti-corruption audits to better identify gaps in the compliance program with SojitzCorporation of America
-Promote a culture of ethics within an organization to combat non-compliance with Morgan Stanley
-Assess the continued challenges in conducting a 3^rd party due diligence program with Parker Drilling

The marcus evans 8^th Annual Anti-Corruption & FCPA Conference is a highly intensive, content-driven event that includes, workshops, presentations and panel discussions, over three days. This conference aims to bring together heads, VP’s, directors, chief compliance officers, and in-house counsel in order to provide an intimate atmosphere for both delegates and speakers.

This is not a trade show; our 8^th Annual Anti-Corruption & FCPA Conference is targeted at a focused group of senior level executives to maintain an intimate atmosphere for the delegates and speakers. Since we are not a vendor driven conference, the higher level focus allows delegates to network with their industry peers.

UK Court Decision on Objective Justification for Age Discrimination Claims

Matthew Howse and Robert Sinclair of Morgan, Lewis & Bockius LLP recently had an article about Age Discrimination in the UK published in The National Law Review:

Long awaited judgment from the Court of Appeal focuses on the merits of the ‘cost-alone’ argument.

The UK Court of Appeal released the much anticipated decision in Woodcock v. Cumbria Primary Care Trust. The decision centred on objective justification. Unlike other forms of discrimination in the UK, direct age discrimination can be objectively justified.

The objective justification test has two key elements: (i) does the employer have a legitimate aim and (ii) are the means chosen a proportionate way of achieving that aim, bearing in mind the discrimination to which it gives rise?

Whilst various factors can be used to justify age discrimination, the status quo position is that ‘cost alone’ cannot be used to justify otherwise discriminatory conduct and that more is required. This has become known as the ‘cost-plus’approach. ‘Cost’ is anything that has a purely financial consideration, i.e. the motivation is purely to save costs.

The Court of Appeal in Woodcock looked at the possibility of an employer justifying discrimination on a ‘cost-alone’ basis.

Background

Mr Woodcock’s employer (the Trust) was going through a reorganisation which would result in the reduction of chief executives required in the Trust. He was made aware that his role was ‘at risk of redundancy’ in early 2006 and he therefore applied for one of the remaining chief executive roles left in the new structure. Following a selection process, Mr Woodcock was informed in July 2006 that he was not successful in his application. He then entered into informal discussions about finding alternative employment in the Trust, although no formal consultation began.

In 2007, the Trust realised that Mr Woodcock would receive a significant pension windfall if he were still employed by the Trust on his 50th birthday. The windfall amounted to approximately £500,000. Given this potential windfall, the Trust elected to give Mr Woodcock notice of termination on the grounds of redundancy before entering into a consultation process during Mr Woodcock’s 12-month notice period. No suitable alternative roles were found and Mr Woodcock’s employment terminated in May 2007. He received his contractual redundancy pay of £220,000 (well above the cap for unfair dismissal of approximately £70,000).

Mr Woodcock was clearly discriminated against on the grounds of age. He received his dismissal notice prior to consultation because of the pension windfall he would have received at his attainment of age 50. If he had been a year younger, a consultation process would have been followed first. In order to follow a fair process in the UK, an employer should consult with an employee before deciding whether he or she is redundant.

Age Discrimination Justified?

At first glance, it is hard to see how this case turns on anything other than the Trust’s financial considerations.

The lower courts, however, found that the discriminatory treatment was objectively justified using the ‘cost-plus’ approach—the ‘plus’ being the genuine redundancy situation and avoiding the potential windfall.

Although possible to pigeonhole these facts into the ‘cost-plus’ test, the lower courts agreed that it was slightly artificial. One of the questions the Court of Appeal considered was whether age discrimination could be objectively justified on a ‘cost-alone’ basis.

Court of Appeal Decision

Although the Court of Appeal agreed that the current ‘cost-plus’ approach results in a degree of artificiality, it accepted that the current guidance from the European Court of Justice is clear, i.e. an employer cannot justify discriminatory treatment ‘solely’ because of cost.

The Court of Appeal, however, agreed with the lower courts and held that the age discrimination in this case was objectively justified on a ‘cost-plus’ analysis because (i) the dismissal notice was served with the aim of giving effect to the Trust’s genuine decision to terminate Mr Woodcock’s employment on the grounds of his redundancy and (ii) it was a legitimate part of that aim for the Trust to ensure that, in giving effect to it, the dismissal also saved the Trust the potential pension fund windfall.

Conclusion

It appears as though the ‘cost-plus’ approach is here to stay. The good news is that the courts appear able to find their way around the problem of having to follow the ‘cost-plus’ approach in most cases.

Despite the courts’ current flexibility, employers should remain hesitant to commit to a ‘cost-alone’ approach and should continue to look for the ‘further factor’.

2012 National Law Review Law Student Writing Competition

The National Law Review is pleased to announce their 2012 Law Student Writing Competition

The National Law Review (NLR) consolidates practice-oriented legal analysis from a variety of sources for easy access by lawyers, paralegals, law students, business executives, insurance professionals, accountants, compliance officers, human resource managers, and other professionals who wish to better understand specific legal issues relevant to their work.

The NLR Law Student Writing Competition offers law students the opportunity to submit articles for publication consideration on the NLR Web site. No entry fee is required. Applicants can submit an unlimited number of entries each month.

Winning submissions will be published according to specified dates.
Entries will be judged and the top two to four articles chosen will be featured on the NLR homepage for a month. Up to 5 runner-up entries will also be posted in the NLR searchable database each month.
Each winning article will be displayed accompanied by the student’s photo, biography, contact information, law school logo, and any copyright disclosure.
All winning articles will remain in the NLR database for two years (subject to earlier removal upon request of the law school).

In addition, the NLR sends links to targeted articles to specific professional groups via e-mail. The NLR also posts links to selected articles on the “Legal Issues” or “Research” sections of various professional organizations’ Web sites. (NLR, at its sole discretion, maydistribute any winning entry in such a manner, but does not make any such guarantees nor does NLR represent that this is part of the prize package.)

Congratulations to our 2012 and 2011 Law Student Writing Contest Winners

Winter 2012:

Fall 2011:

Why Students Should Submit Articles:

Students have the opportunity to publicly display their legal knowledge and skills.
The student’s photo, biography, and contact information will be posted with each article, allowing for professional recognition and exposure.
Winning articles are published alongside those written by respected attorneys from Am Law 200 and other prominent firms as well as from other respected professional associations.
Now more than ever, business development skills are expected from law firm associates earlier in their careers. NLR wants to give law students valuable experience generating consumer-friendly legal content of the sort which is included for publication in law firm client newsletters, law firm blogs, bar association journals and trade association publications.
Student postings will remain in the NLR online database for up to two years, easily accessed by potential employers.
For an example of a contest winning student written article from Northwestern University, please click here or please review the winning submissions from Spring 2011.

Content Guidelines and Deadlines

Content Guidelines must be followed by all entrants to qualify. It is recommended that articles address the following monthly topic areas:

March Topic Feature: Environmental and Energy, Insurance and Intellectual Property Law
March Submission Deadline: Tuesday, February 21, 2012
May Topic Feature: Tax, Bankruptcy and Restructuring and Healthcare Law
May Submission Deadline: Monday, April 16, 2012

Articles covering current issues related to other areas of the law may also be submitted. Entries must be submitted via email to lawschools@natlawreview.com by 5:00 pm Central Standard Time on the dates indicated above.

Articles will be judged by NLR staff members on the basis of readability, clarity, organization, and timeliness. Tone should be authoritative, but not overly formal. Ideally, articles should be straightforward and practical, containinguseful information of interest to legal and business professionals. Judges reserve the right not to award any prizes if it is determined that no entries merit selection for publication by NLR. All judges’ decisions are final. All submissions are subject to the NLR’s Terms of Use.

Students are not required to transfer copyright ownership of their winning articles to the NLR. However, all articles submitted must be clearly identified with any applicable copyright or other proprietary notices. The NLR will accept articles previously published by another publication, provided the author has the authority to grant the right to publish it on the NLR site. Do not submit any material that infringes upon the intellectual property or privacy rights of any third party, including a third party’s unlicensed copyrighted work.

Manuscript Requirements

Format – HTML (preferred) or Microsoft^® Word
Length – Articles should be no more than 5,500 words, including endnotes.
Endnotes and citations – Any citations should be in endnote form and listed at the end of the article. Unreported cases should include docket number and court. Authors are responsible for the accuracy and proper format of related cites. In general, follow the Bluebook. Limit the number of endnotes to only those most essential. Authors are responsible for accuracy of all quoted material.
Author Biography/Law School Information – Please submit the following:
1. Full name of author (First Middle Last)
2. Contact information for author, including e-mail address and phone number
3. Author photo (recommended but optional) in JPEG format with a maximum file size of 1 MB and in RGB color format. Image size must be at least 150 x 200 pixels.
4. A brief professional biography of the author, running approximately 100 words or 1,200 characters including spaces.
5. The law school’s logo in JPEG format with a maximum file size of 1 MB and in RGB color format. Image size must be at least 300 pixels high or 300 pixels wide.
6. The law school mailing address, main phone number, contact e-mail address, school Web site address, and a brief description of the law school, running no more than 125 words or 2,100 characters including spaces.

To enter, an applicant and any co-authors must be enrolled in an accredited law school within the fifty United States. Employees of The National Law Review are not eligible. Entries must include ALL information listed above to be considered and must be submitted to the National Law Review at lawschools@natlawreview.com.

Any entry which does not meet the requirements and deadlines outlined herein will be disqualified from the competition. Winners will be notified via e-mail and/or telephone call at least one day prior to publication. Winners will be publicly announced on the NLR home page and via other media. All prizes are contingent on recipient signing an Affidavit of Eligibility, Publicity Release and Liability Waiver. The National Law Review 2011 Law Student Writing Competition is sponsored by The National Law Forum, LLC, d/b/a The National Law Review, 4700 Gilbert, Suite 47 (#230), Western Springs, IL 60558, 708-357-3317. This contest is void where prohibited by law. All entries must be submitted in accordance with The National Law Review Contributor Guidelines per the terms of the contest rules. A list of winners may be obtained by writing to the address listed above. There is no fee to enter this contest.

Data Security Breach Alert: 1.5 Million Credit Card Customers Affected

The National Law Review recently published an article regarding A Recent Security Breach written by Adam M. Veness of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.:

Global Payments, Inc. (NYSE: GPN) (“Global”) has reported a significant data security breach for approximately 1.5 million credit card customers. According to astatement that Global released on Sunday, their investigation has revealed that “Track 2 card data may have been stolen, but that cardholders’ names, addresses and social security numbers were not obtained by criminals.” Using Track 2 data, a hacker can transfer a credit card’s account number and expiration date to a fraudulent card, and then use the fraudulent card for purchases.

As a result of the breach, Visa has removed Global from its list of companies that it considers to be “compliant services providers.” In an effort to calm consumers, Global issued a press release today assuring that “[b]ased on the forensic analysis to date, network monitoring and additional security measures, the company believes that this incident is contained.”

The incident reinforces the importance of maintaining adequate data security. Companies must take ample precautions to secure their customers’ data, and if they fail to do so, they may be vulnerable to a serious security breach that could adversely affect their bottom line. As of the time of this post, Global’s stock price has fallen approximately 12% since the data breach news was announced. Even when following best practices in data security, companies still may face data security breaches. Despite these inevitable risks, companies should do everything reasonably required to protect against data breaches. If a company can show that it has taken the proper precautions, then this may mitigate or reduce potential liability in the event of a breach. After a breach, companies should ensure that they follow all of the strict legal requirements for notifying customers of the breach and remedying the effects of the breach. Doing so may greatly reduce a company’s exposure to customer lawsuits and government action against the company.

RIMS 2012 Annual Conference & Exhibition

The National Law Review is pleased to bring you information about the

RIMS 2012 Annual Conference & Exhibition – REGISTRATION IS NOW OPEN!

Join us April 15-18 in Philadelphia

No Boundaries

If your organization is like most, risk is not confined to just one department. Everyone has risk management responsibilities. At RIMS 2012 Annual Conference & Exhibition, there are no limits to the information and resources available to help you and your organization innovatively minimize risks. You’ll find a wide array of educational sessions offering practical strategies, no matter what your business area. Sessions are offered at all experience levels—from beginner to advanced—so you can design an educational experience that fits your needs. And, the Exhibit Hall is jam-packed with solutions–everything you’ll need for the upcoming year.

RIMS ’12 will be held at the Pennsylvania Convention Center located on 1101 Arch Street, Philadelphia, PA 19107.

What’s New!

Continuing Education: RIMS has partnered with the CEU Institute to administer CE/CEU/CPE credits at RIMS ‘12! Learn more.

Exhibit Hall Pass: Available for Wednesday, April 18 only. Register now.

Strategic Risk Management (SRM): New sessions offering concepts and analytic resources to enrich organizational strategic risk decisions. View sessions.

RIMS ’12 Mobile App: Get live event updates, interactive floor maps, exhibitor collateral and more. Coming soon! Check back for details.

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.

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2012 National Law Review Law Student Writing Competition