Tag: Financial Services Law

Payments by Enron are "Settlement Payments" under the Bankruptcy Code's Safe Harbor Provisions

An interesting article recently published in the National Law Review  by David A. Zdunkewicz of  Andrews Kurth LLP  regarding the Second Circuit Court of Appeals protecting  payments made by Enron to redeem commercial paper prior to maturity as “Settlement Payments” under the Bankruptcy Code’s Safe Harbor Provisions.

In a matter of first impression in In Re: Enron Creditors Recovery Corp., v. ALFA, S.A.B. DE C.V., et al., No. 09-5122-bk(L) the United States Court of Appeals for the Second Circuit sided with two holders of Enron’s commercial paper who received prepetition payments redeeming the paper prior to its stated maturity. The price paid by Enron to redeem the debt was considerably higher than the market value of the debt.

Enron argued that the payments were either preferential or constructively fraudulent transfers and were not “settlement payments” under section 546(e) of the Bankruptcy Code because (i) the payments were not “commonly used in the securities trade,” (ii) the definition of “settlement payment” includes only transactions in which title to the securities changes hands and, therefore, because the redemption was made to retire debt and not to acquire title to the commercial paper, no title changed hands and the redemption payments are not settlement payments, and (iii) the redemption payments are not settlement payments because they did not involve a financial intermediary that took title to the transacted securities and thus did not implicate the risks that prompted Congress to enact the safe harbor.

The Second Circuit rejected each of Enron’s arguments, holding that the payments qualified as “settlement payments” under the Bankruptcy Code’s safe harbor provisions.

As to Enron’s first argument, the Court disagreed that the payments must have been common in the securities trade to qualify as a settlement payment under the Bankruptcy Code. Section 741(8) of the Bankruptcy Code defines “settlement payment” as “a preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment, or any other similar payment commonly used in the securities trade.” Enron argued that the phrase “commonly used in the securities trade” modified each of the preceding terms in section 741(8), not only the immediately preceding term. The Second Circuit disagreed and held that the phrase “commonly used in the securities trade” only modified the immediately preceding term in Section 741(8), i.e. it only modified “similar payment.” Thus there is no requirement that the payments made to the holders be common in the securities trade.

As to Enron’s second argument, the Second Circuit found nothing in the Bankruptcy Code or the relevant caselaw to exclude the redemption of debt securities from the definition of a settlement payment. Accordingly, there is no requirement, as Enron argued, that title to the securities change hands for the payment to be considered a settlement payment under the Bankruptcy Code.

Finally, the Second Circuit rejected the third argument advanced by Enron. Enron argued that the redemption of debt did not constitute a settlement payment because it did not involve a financial intermediary that took a beneficial interest in the securities during the course of the transaction. Thus, the argument goes, the redemption would not implicate the systemic risks that motivated Congress to enact the safe harbor provision for settlement payments.

The Second Circuit rejected the argument and held that the fact that a financial intermediary did not take title to the securities during the course of the transaction is a proper basis to deny safe-harbor protection, joining the Third, Sixth, and Eighth Circuits in rejecting similar arguments. The Court stressed that § 546(e) applies to settlement payments made “by or to (or for the benefit of)” a number of participants in the financial markets and it would be inconsistent with this language to restrict the definition of “settlement payment” to require that a financial intermediary take title to the securities during the course of the transaction.

While each case must be determined on a case-by-base analysis, the Second Circuit’s ruling in Enron reflects a continued trend among the Court of Appeals to broadly interpret the safe harbor provisions of the Bankruptcy Code and protect covered transactions.

© 2011 Andrews Kurth LLP

 

 

 

 

 

CFPB has no plan to ban financial products, Warren tells GOP-led committee

Recently posted in the National Law Review by Shirley Gao of the Center for Public Integrity about the new Consumer Financial Protection Bureau:

The new Consumer Financial Protection Bureau, which opens for business next week, does not plan to ban specific financial products, presidential adviser Elizabeth Warren told Congress.

Banning fraudulent financial products and services “is a tool in the toolbox, and that’s where it should stay,” Warren testified at a Republican-led House Oversight and Government Reform hearing on Thursday, the Wall Street Journal, Politico and other media reported. “We have no present intention to ban a product, but we are still learning about what’s out there” she said.

Republicans on the panel, who questioned Warren at a contentious hearing in late May, grilled Warren about whether the CFPB may try to outlaw payday loans and try to regulate new car loans.

“The American people have a right to know how the bureau will advance and enforce its regulatory assignment,” said Committee Chairman Darrell Issa, a California Republican. “Consumers deserve opportunities to choose between lending alternatives and other financial tools that establish credit and give buyers the chance for affordable enhancements to their standards of living.”

A C-span video of the three and one-half hour hearing is posted here. 

Banks push to weaken derivatives rules – In a potential win for big banks, federal regulators are considering a weaker version of a plan that initially sought to limit a big bank from controlling more than 20 percent of any one derivatives exchange.

The Commodity Futures Trading Commission is now privately discussing a lower cap after aggressive lobbying by Wall Street, the New York Times Dealbook reports.  How aggressive?  CFTC officials have held almost 50 private meetings with players including mega-banks such as Goldman Sachs Group Inc. and Morgan Stanley.

New financial data office – A new Treasury Department office tasked with collecting data from banks, hedge funds and brokerages is yet another example of government overreach and a likely target for hackers, Republicans warned Thursday at a House hearing.

The Office of Financial Research was created by the Dodd-Frank reform law with the power to collect and analyze company-specific data to help regulators pinpoint systemic risks to the economy.

The new office “has very broad power and authority with very few checks and balances,” said Texas Republican Randy Nuegebauer . “There is no limit to the information you can require from a company.”

Oil payment rules – Human rights groups urged the Securities and Exchange Commission to hurry up and finalize an energy industry anti-corruption rule that was tucked into the Dodd-Frank law.

The proposed SEC rule would force oil, natural gas and other energy companies listed on U.S. stock exchanges to disclose exactly how much each pays to overseas governments to acquire drilling and production rights. Energy companies have fought the SEC plan, saying the requirement would be overly burdensome and costly.

Reprinted by Permission © 2011, The Center for Public Integrity®. All Rights Reserved.

New York’s Highest Court Reinstates $5 Billion Lawsuit By Big Banks Against MBIA

Posted recently at the National Law Review by Michael C. Hefter and Seth M. Cohen of Bracewell & Giuliani LLP news about New York’s highest court reinstating a $5 billion lawsuit brought by a group of banks, including Bank of America and Wells Fargo, against MBIA. 

New York’s highest court yesterday reinstated a $5 billion lawsuit brought by a group of banks, including Bank of America and Wells Fargo, against insurance giant MBIA. ABN AMRO Bank, et al. v. MBIA Inc., et al., — N.E. 2d –, 2011 WL 2534059, slip op. (June 28, 2011). The Plaintiffs-banks sought to annul MBIA’s 2009 restructuring, which separated the insurer’s municipal bond business from its troubled structured finance unit, on the grounds that the transactions left the insurer incapable of paying insurance claims in violation of New York’s Debtor and Creditor Law. The Superintendent of Insurance in New York approved the transactions that effectuated the split of MBIA’s business in 2009. 

The Court of Appeals’ decision represents a victory for Wall Street banks in one of the many battles being fought in connection with the collapse of the financial markets. Those banks saw their fraudulent transfer claims against MBIA dismissed earlier this year by the Appellate Division, First Department. The intermediate appellate court determined that the banks’ fraudulent transfer claims were a “collateral attack” on the Superintendent’s authorization of the restructuring and that an Article 78 proceeding challenging that authorization was the sole remedy available to the Plaintiffs. The banks’ remedies under Article 78 – a procedure entitling aggrieved parties to challenge agency decisions – would be limited compared to those remedies available in state or federal court under a fraudulent transfer theory. 

At issue for the Court of Appeals was whether the Plaintiffs-banks had the right to challenge the restructuring plan in light of the Superintendent’s approval. Plaintiffs argued that the restructuring was a fraudulent conveyance because MBIA Insurance siphoned approximately $5 billion in cash and securities to a subsidiary for no consideration, thereby leaving the insurer undercapitalized, insolvent and incapable of meeting its obligations under the terms of the respective insurance policies. MBIA countered that, as held by the First Department, Plaintiffs’ claims were impermissible “collateral attacks” on the Superintendant’s approval of the restructuring. 

In a 5-2 decision, the Court of Appeals modified the First Department’s decision and reinstated the Plaintiffs’ breach of contract, common law, and creditor claims. In an opinion authored by Judge Carmen Beauchamp Ciparick, the Court held that NY Insurance Law does not vest the Superintendent with “broad preemptive power” to block the banks’ claims. MBIA Inc., 2011 WL 2534059, slip op. at 16.

“If the Legislature actually intended the Superintendent to extinguish the historic rights of policyholders to attack fraudulent transactions under the Debtor and Creditor Law or the common law, we would expect to see evidence of such intent within the statute. Here, we find no such intent in the statute.” Id.

Critical to the Court’s holding was that Plaintiffs had no notice or input into the Insurance Department’s decision to approve MBIA’s restructuring. “That the Superintendent complied with lawful administrative procedure, in that the Insurance Law did not impose a requirement that he provide plaintiffs notice before issuing his determination, does not alter our analysis,” Judge Ciparick wrote. “To hold otherwise would infringe upon plaintiffs’ constitutional right to due process.” MBIA Inc., 2011 WL 2534059, slip op. at 21. Moreover, the Court noted that Plaintiffs’ claims could not be properly raised and adjudicated in an Article 78 proceeding. Id.

The Court’s decision re-opens claims by multiple financial institutions that MBIA instituted the restructuring in order to leave policyholders without financial recourse. 

The case is ABN AMRO BANK NV. et al., v. MBIA Inc., et al, 601475-2009 (N.Y. State Supreme Court, New York County.)

© 2011 Bracewell & Giuliani LLP

Anti-Money Laundering Strategies and Compliance Conference May 9-11 New York, NY

Anti-money laundering officers, professionals, and in-house counsel should attend this conference to better understand the changing environment of the financial industry, learn how companies are adapting to these changes, and to identify new measures in which criminals are laundering money through the United States financial system. With technological advancements and the introduction of money laundering into new financial entities, it is important that anti-money laundering professionals and in-house counsel who oversee anti-money laundering compliance to stay abreast of current AML issues and best practices for preventing money laundering and suspicious activities from occurring in their organizations.

The Anti-Money Laundering conference is a highly intensive, content-driven event that includes case studies, presentations, and panel discussions over two full days. This conference targets industry leaders in AML, and Financial Compliance roles in order to provide an intimate atmosphere for both delegates and speakers.

key conference topics include:

Explore the Office of Foreign Assets Control Sanctions Program and updates to the Iranian Sanctions

  • Evaluate the increasing correlation between fraud and money laundering
  • Discuss potential risks that emerging technological products pose to the financial industry
  • Investigate the increase in money laundering through the US from Narcotics Trade and Human Trafficking

 Registration, Location & Details…..

  • May 9-11 Doubletree Metropolitan, New York City, NY, USA
  • To Register and for More information – please click here:

Evaluating Critical Regulatory Reforms to Facilitate Compliance and Effectively Manage Regulatory Risk in the Financial Industry May 9-10 NY, NY

The National Law Review would like to remind you of the upcoming conference in NYC May 9-10:  Evaluating Critical Regulatory Reforms to Facilitate Compliance and Effectively Manage Regulatory Risk in the Financial Industry This conference is geared towards C-Level Executives, EVPs, SVPs, VPs, and Directors involved in compliance, risk, audit, AML or regulatory policy. Hear from leading executives within the financial services industry on how to stay up-to-date and ensure compliance with regulatory reforms such as the Dodd-Frank Act and Basel III.

Attending this premier conference will give you the chance to address critical issues within the industry including new capital and liquidity requirements, economic consequences of new regulations and the restructuring of regulatory bodies. Conference attendees will gain practical knowledge on how to optimize their compliance and regulatory risk management programs.

Attending this conference will allow you to:

  • Examine critical regulatory reforms affecting the financial services industry, including the Dodd-Frank Act and Basel III
  • Address the impact of tighter regulation on the financial sector
  • Evaluate the people, process and technology required to facilitate compliance with regulatory reforms
  • Develop a long term approach to increasing operational efficiency in the compliance arena
  • Discuss best practices for regulatory compliance in the financial industry

The marcus evans Regulatory Risk Compliance conference is a highly intensive, content-driven event that includes presentations and panel discussions over two full days. This conference targets industry leaders in compliance, risk, audit, anti-money laundering, legal, regulatory policy, and general counsel roles in order to provide an intimate atmosphere for both delegates and speakers.

This is not a trade show; our Regulatory Risk Compliance 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.

Current Speakers Include:

  • HSBC North America
  • Wells Fargo Brokerage
  • UBS Wealth Management Americas
  • State Farm Bank
  • JP Morgan Chase
  • Bank of New York Mellon
  • The Northern Trust Company
  • Capital One Financial
  • Societe Generale

 

Registration, Location & Details…..

  • Doubletree Metropolitan Hotel, New York City, NY, USA 9-10 May 2011
  • For More Information and to Register – Please Click Here:

 

Financial Services Compliance Summit May 25-26 New York, NY

The National Law Review is a proud media sponsor of the IQPC Financial Services Compliance Summit May 25-26 in New York, NY

Rethinking Compliance Strategies to Maximize Business Value

In the aftermath of the financial crisis, financial institutions must adhere to changing regulations and have undergone a dramatic transformation. These changes have caused a drastic shift in business practices, regulatory oversight, and litigation exposure. Companies are spending immense amounts of time, resources and money to ensure that compliance polices are meeting evolving regulatory mandates

The Financial Services Compliance Summit, led by leading legal and compliance professionals, including senior staff at the SEC, FTC and CFTC will offer expert insights on how to improve internal controls across departments.

Highlighted topics include:

  • Key changes in regulations including the Dodd-Frank Wall Street Reform & Consumer Protection Act, and what it means for broker-dealers and investment advisers
  • Compliance challenges facing financial services companies in this new operating environment
  • Advice on the use of social media and the latest on advertising and marketing restrictions
  • SEC, FINRA and CFTC enforcement and examination developments
  • How to use technology to analyze and create an enterprise-wide compliance program

For Registration and Details:

Residential Foreclosures: Lenders Become Landlords

Featured Guest blogger at the National Law Review, W. Alexander Burnett of Williams Mullen provides great insight on the evolving role of certain lenders becoming landlords after foreclosures:  

 

Protecting Tenants at Foreclosure Act of 2009, Public Law 111-22

Introduction

On May 20, 2009, President Obama signed into law the Protecting Tenants at Foreclosure Act (the “PTFA” or the “Act”). The PTFA was part of the larger “Helping Families Save Their Homes Act of 2009.” The Act provides new protections to bona fide tenants in any federally-related mortgage loans or any residential real property. Before enactment of PTFA, a new owner of a foreclosed property could take immediate action to evict an existing tenant. The PTFA requires the foreclosing party to allow the tenant to remain in the premises through the end of the lease term, and it requires the foreclosing party to provide a bona fide tenant with at least 90 days notice to vacate. As a result, lenders and other parties who foreclose on residential rental property occupied by a tenant have no choice but to play the role of landlord until the expiration of the tenant’s lease. This article explains who is affected by the Act, the requirements under the Act, and the respective rights, remedies and obligations for both foreclosing parties and tenants who occupy the foreclosed properties.

The Basics

Who Is Affected by the PTFA?

The PTFA applies to any residential real property or any “federally-related mortgage loan” acquired through foreclosure. The only properties not covered by the Act are non-residential properties that were not foreclosed in connection with a federally-related mortgage loan. Note that one court in New York has held that the PTFA can only be enforced where “federally-related mortgage loans” are involved and that the enforcement of the PTFA in all residential loan situations “would extend federal control to arguably every area of human endeavor and vitiate the constitutional framers’ requirement that ‘federalism’ involves a limited universe of power and that the states retained all but expressly ceded powers.” Collado v. Boklari, 892 N.Y.S.2d 731 (N.Y. Dist. Ct. 2009). It is important to note, however, that this case has been distinguished by at least one other court, and that other courts have held that the PTFA applies in connection with non-federally-related mortgage loans.

The PTFA protects the rights of a “bona fide tenant,” which is defined by the Act as a person in possession of the property with or without a lease, provided that:

i. the tenant is not the mortgagor or the child, spouse, or parent of the mortgagor;

ii. the lease or tenancy was the result of an arms-length transaction; and

iii. the lease or tenancy requires the receipt of rent that is not substantially less than fair market rent for the property, or the rent is reduced or subsidized due to a federal, state, or local subsidy.

All three elements must be satisfied for a tenant to be a bona fide tenant.

The new restrictions in the PTFA are binding on any “immediate successor in interest” in the property. While the Act does not define “immediate successor in interest,” the term generally means the first party to take title to the property following the foreclosure. Note that the PTFA does not specifically address the situation involving a deed in lieu of foreclosure.

What Are the Effective Dates of the Act?

The PTFA became effective immediately upon enactment on May 20, 2009 and applies to all foreclosures that occur after enactment; pending foreclosures included. The provisions of the Act expire on December 31, 2012.

What Requirements Are Imposed on an Immediate Successor in Interest?

First, a successor must allow any existing tenants to remain in the premises until the end of the lease term. If, however, the property is sold to a purchaser who will occupy the property as a primary residence, then the new owner can give 90 days notice of the early termination of the lease. Second, if the lease has expired, is month-to-month or is terminable at will, the successor must give the tenant at least 90 days notice before requiring the tenant to vacate the property. The PTFA, therefore, places drastic new burdens on lenders and other foreclosing parties, especially when there is a significant amount of time remaining under a residential lease, because the lender must serve as a landlord throughout the duration of that lease.

The notice to vacate must be given to the tenant by the successor. Therefore, the successor can’t give notice prior to acquiring title to the property at the foreclosure sale. Accordingly, the notice of foreclosure sale cannot also serve as the 90-day notice to vacate. It is good practice to send the notice to vacate and any other notices to the tenant by Certified Mail, Return Receipt Requested, and to keep the receipts in case they are needed to prove to a court that proper notice was given.

Unfortunately, the PTFA does not give any details or set forth the rights or remedies of the successor during the time that the tenant is allowed to remain in the property. The Act merely states that successor assumes an interest in the property “subject to the rights of any bona fide tenant.” That likely means that the successor steps into the shoes of the former landlord and assumes both the rights and responsibilities of the landlord under the lease. This, of course, raises many questions which the Act does not answer.

Reading Between the Lines: The Details Behind the PTFA

What Responsibilities Do Tenants Owe to their New Landlords?

Presumably, a tenant must abide by all of the provisions in the lease. If the tenant defaults under the lease, the Act does not preempt a landlord from evicting the tenant without giving the 90 day notice under the Act. If a tenant has stopped paying rent, for example, the new landlord should follow applicable provisions under the lease and in the Landlord Tenant Act (Va. Code § 55-217, et seq.) or the Virginia Residential Landlord Tenant Act (Va. Code § 55-248.2, et seq.) to give proper notice of the default to the tenant and then to file an Unlawful Detainer suit to evict the tenant.

The Successor Has the Burden of Proving that an Occupant Is Not a Bona Fide Tenant.

In Bank of America v. Owens, the successor issued a 90 day notice to vacate immediately after foreclosure. 2010 NY Slip Op 20164, 2010 N.Y. Misc. LEXIS 954 (N.Y. City Ct. May 5, 2010). Along with the notice to vacate, the successor also issued a questionnaire to determine if the occupant was a bona fide tenant. The questionnaire stated that, if it was not returned to the successor within five days, the successor would commence eviction proceedings. When the questionnaire was not returned, the successor filed an eviction suit immediately and well before the expiration of the 90 day period. The court held that the new burden imposed by the questionnaire was impermissible and was not authorized by the PTFA. The court also held that the burden is on the successor to show that an occupant is not a bona fide tenant.

Can Tenants File Suit Against Successors For Violating the PTFA?

No. The PTFA does not create a private right of action. In Nativi v. Deutsche Bank National Trust Co., the Bank foreclosed on property and evicted the tenants one month later without giving 90 days notice. 2010 U.S. Dist. LEXIS 51697 (N.D. Cal. May 26, 2010). The tenants’ personal property was placed on the street where it was damaged or stolen. The tenants filed suit against the Bank seeking money damages for, among other causes of action, violations of the PTFA. The court held that the PTFA does not create a private cause of action and dismissed the PTFA count. See also, Fannie Mae v. Lemere, 2010 U.S. Dist. LEXIS 67005 (E.D. Cal. July 6, 2010) (“[F]ederal courts have held that the [PTFA] does not create a federal private right of action, but indeed provides directives to state courts.”) It is important to note, however, that these tenants may have had other valid causes of action against the bank, such as conversion or unlawful ouster. In addition, it is clear from the Bank of America v. Owens case that a tenant may use a violation of the PTFA as a defense in an eviction proceeding, even though it cannot be used as the basis for an affirmative claim for damages against a successor.

Is the New Landlord Responsible for the old Security Deposit?

This question is simply not answered by the Act, and there are no cases from the Virginia state or federal courts that interpret the Act. Generally speaking, however, under Virginia law a foreclosure wipes out the lease, which suggests that the new landlord is not responsible for the security deposit. In addition, the old landlord holds the security deposit in trust for the tenant. If the old landlord fails to transfer the security deposit to the new landlord, pursuant to Va. Code § 55-507, then the tenant would have a direct claim against the old landlord. The new landlord may not have any recourse against the old landlord. Furthermore, under the PTFA the new landlord steps into the shoes of the old landlord only with respect to the real property itself and not with respect to incidentals such as the security deposit. Nevertheless, it is possible that a court making a generous interpretation of the PTFA could find that the new landlord stepped into the same shoes of the old landlord and, therefore, is responsible for the old security deposit.

Can a Successor Terminate a Lease Early Using “Cash for Keys”?

Yes. “Cash for keys” is a program offered by many mortgage lenders where the tenant agrees to turn over the property in good condition and/or before the expiration of the tenant’s lease in exchange for a cash payment from the lender. It is no different than an agreement between a landlord and tenant to modify or terminate a lease early. There is no magic to it, and there is nothing in the PTFA that prevents a successor and a tenant from reaching such an agreement. It is important, however, to ensure that the transaction is arms-length, that it is agreed to voluntarily by both the successor and the tenant, and that the parties put the agreement in writing and sign it.

© 2011 WILLIAMS MULLEN ALL RIGHTS RESERVED

 

7th Securities Litigation and Enforcement Summit April 26-27 New York, NY

The National Law Review is proud to be a media partner for the upcoming IQPC’s 7th Securities Litigation and Enforcement Summit –  April 26-27 in New York, NY.   This two day event will feature panel discussions, case studies, contemporary insights and practical advice vital to the successful management of securities litigation. 

The second half of 2010 the securities industry witnessed a rise in class action suits mainly due to an increase of undisclosed product and operational defects, breaches of fiduciary duties and accounting improprieties. Securities litigation and associated risk is thus once again front and center in the legal landscape.

ATTEND AND LEARN ABOUT:

  • SEC, DOJ and State Attorneys General enforcement initiatives and actions
  • New enforcement initiatives under the Frank Dodd Act – what will be the impact for securities litigation cases?
  • Developing effective strategies to respond to and resolve government enforcement actions
  • Aligning litigation strategy with macro economic considerations
  • International trends impacting US based securities litigation
  • Recent trends in Insider Trading and Fraud investigations

Register By Friday March 25th and Save:

Please click here for more information and to register:


Foreclosure or Deed in Lieu: What’s Right for You?

This week’s featured bloggers at the National Law Review are from Williams Mullen.  Jamie Watkins Bruno details two options available in Virgina for defaulted loans secured by deeds:  

In Virginia, a lender holding a defaulted loan secured by a deed of trust has two primary means to enforce its remedies under that deed of trust: foreclosure by a trustee’s sale and conveyance by a deed in lieu of foreclosure. We’ve put together a brief primer summarizing the key strengths, weaknesses and procedural guidelines for each alternative to help you determine which option works best for your needs, timeline and budgetary constraints.

I. Trustee’s Sale.

The most common procedure for foreclosure is the sale of the property by a trustee, a non-judicial action. A trustee can act only in a manner authorized by the express or implied terms of the trust instrument or as authorized by statute. If the deed of trust does not provide otherwise, the provisions of the Virginia Code control as to the authority of the trustee. Foreclosure by a trustee’s sale can usually be completed within thirty (30) to forty-five (45) days after the expiration of any cure period provided by the loan documents for the default giving rise to the foreclosure, if the lender acts promptly.

A. The Trustee.

1. Duties and Obligations. A trustee is a fiduciary for both the debtor and the creditor. The trustee must not place himself in a position where the trustee’s personal interests conflict with the interests of the parties to whom he owes a fiduciary duty. A trustee who is counsel to or an employee of the noteholder must be sensitive to the obligation to discharge his fiduciary duties in an impartial manner. The mere fact that a trustee in a deed of trust securing a debt due to a corporation is a stockholder, member, employee, officer or director of, or counsel to, the corporation, however, does not disqualify him from exercising the powers conferred by the trust instrument. Trustees cannot act as purchasers, directly or indirectly, at their own sales; when a trustee buys directly or indirectly at his own sale, that constitutes constructive fraud, and the transaction is voidable. This rule also applies to a trustee who is named in a deed of trust but does not act.

2. Substitution of Trustee. If the person who is to conduct the foreclosure is not named in the deed of trust as trustee, a substitution of trustee is needed. When an instrument appointing a substitute trustee has been executed by the holders of more than fifty percent (50%) of the secured obligations, the substitute trustee can immediately execute all powers granted to the prior trustee.

    B. Initial Procedures.

    1. Documentation. A trustee should secure the proper documentation from the noteholder, which includes the deed of trust, the original note, title evidence (including title policies and surveys), copies of any correspondence between the noteholder and the debtor, copies of mortgage insurance or guaranty agreements, appraisal, written direction to proceed with the foreclosure and engagement letter. The trustee should verify that the noteholder has complied with all notice requirements set forth in the deed of trust.

    2. Diligence. A trustee should contact the local commissioner of accounts regarding fees charged for approving and examining accounts as well as any local requirements, including proper advertisement procedures. Though the trustee is only charged with selling the property encumbered by the deed of trust, the noteholder should consider any relevant diligence issues affecting the property prior to initiating foreclosure proceedings, including environmental matters, permits, insurance, utilities, leases, appraisal, physical condition and rights in fixtures. In addition, though there is no statutory right of redemption in Virginia, the debtor does have the right to pay off the secured indebtedness before the sale; some deeds of trust provide for reinstatement of the debt if the debtor cures all defaults and pays all expenses in the manner and time provided in such deeds of trust.

    3. Title. While the doctrine of caveat emptor applies in a foreclosure sale, a trustee must be aware of all liens and encumbrances affecting the property. A trustee cannot sell a greater interest in the property than the deed of trust gives him authority to sell, and any sale by the trustee will be subject to encumbrances having precedence over the deed of trust. A trustee must be aware of all encumbrances on the property, including federal tax liens, in order to properly notify all interested parties, to exercise proper discretion as to whether a fair sale can be had, and to make a lawful distribution of the proceeds of the sale. A trustee should order a title rundown of the property from the date of the original title policy, which can be obtained for approximately $100-$250.

      C. Notice.

      The trustee has no authority to exercise the power of sale or to obtain possession of the property until such time as the debtor defaults under the terms of the note and the trust instrument. The trustee must satisfy himself that the note and the deed of trust are actually in default before initiating foreclosure proceedings, including providing any pre-acceleration notice required by either document.

      1. Requirements; Timing. The present owner of the property must be given written notice of sale at his last known address as such address and owner’s name appear in the records of the secured party, which must be personally delivered or sent by registered or certified mail at least fourteen (14) days before the date of the foreclosure sale. It is a good idea to send a separate notice to each owner by regular mail. Each such must provide the date, time, and place of sale and is sufficient if it contains the same information set forth in the public advertisement of the sale. ‘Inadvertent’ failure to give notice imposes no liability on either the trustee or the secured party, and failure to comply with the notice requirements will not affect the validity of the sale. A purchaser for value will have no duty to ascertain whether proper notice was given. Actual receipt by the owner of the foreclosure notice is not required, and a defective statutory notice does not affect the validity of a foreclosure sale.

      2. Other Parties. Notice should also be given to any guarantors of the indebtedness, subordinate lienholders, private mortgage insurers, the United States (if a federal tax lien affects the property) and any government agencies that are involved with the secured loan. If a federal tax lien affects the property and has been filed for at least thirty (30) days before the date of the proposed sale, notice should be given to the United States at least twenty-five (25) days prior to such sale.

        D. Advertisement.

        A trustee must conform the advertising to the terms of the deed of trust, and any material departure will invalidate the sale. Substantial compliance, however, is sufficient as long as the rights of the parties are not materially affected. Section 55-62 of the Virginia Code provides a permissible form of notice that must include the time, place, and terms of sale, including the amount of any deposit required. The advertising provisions are mandatory and override the discretion of the trustee, regardless of the contractual agreement of the parties.

        1. Requirements; Timing. The advertisement must briefly describe the property to be sold by street address, if any, and, if there is no street address, the general location of the property with reference to routes, streets, and known landmarks. The tax map identification number of the property may be used but is not required. The advertisement must also include the name, address, and telephone number of the trustee and the secured party, or the secured party’s agent or attorney, to respond to inquiries from the public about the sale. Advertisement of the foreclosure must be made in a newspaper having a general circulation in the city or county where the property being sold or any portion thereof lies. The sale can be held no earlier than eight (8) days after the first advertisement and no later than thirty (30) days after the last advertisement.

        2. Number of Publications. If the deed of trust provides for the number of publications by using language such as “advertisement required,” then the direction of the deed of trust must be followed. In any event, if the newspaper advertisement is published on a weekly basis, it must be published not less than once a week for two weeks before the sale; and if published on a daily basis, it must be published not less than once a day for three days, which may be consecutive days. If the deed of trust does not provide for the number of publications, the Virginia Code requires that “the trustee shall advertise once a week for four successive weeks; provided, however, that if the property or some portion thereof is located in a city or in a county immediately contiguous to a city, publication of the advertisement five different days, which may be consecutive days, shall be deemed adequate.”

          E. The Sale.

          There are virtually no rules regarding bidding at a foreclosure sale, other than that the purchase price of the property must not be so low as to ‘shock the conscience’. The sale may take place “at the premises or at such other place in the city or county in which the property or the greater portion thereof lies, or in the corporate limits of any city surrounded by or contiguous to such county.” Most sales take place on the front steps of the city or county circuit court building. In the absence of specific direction in the trust instrument, the trustee is authorized to sell “upon such terms and conditions as the trustee may deem best.” This language has been interpreted to include the power to sell either for cash or on credit. The trustee must be present and either conduct or supervise the sale. In the absence of specific authority in the deed of trust, a trustee cannot, even with the consent of the lender, delegate the power to sell and be absent from the sale; the trustee may employ an auctioneer to cry out the sale. Prior to bidding, the trustee should announce the terms of sale and answer any general questions from the public. The trustee should disclose fully any known liens or encumbrances. A contract of sale between a trustee and a purchaser is complete when the trustee knocks down the property to the highest bidder and makes and signs a memorandum of the sale and its terms. The trustee may require a deposit, and a closing will be scheduled for approximately ten (10) to thirty (30) days after the sale, all as set forth in the advertisement. In the event that there was a federal tax lien on the property, the government has a right of redemption for a period of one hundred twenty (120) days, meaning that the government may take the property and reimburse the purchaser for the amount paid within this time frame. The trustee may request the waiver of such right upon the delivery of the notice of sale.

            F. Settlement and Accounting.

            A purchaser can only require a deed with special warranty of title from the trustee. The trustee is not responsible for conveying good title, because a trustee can sell only the interest conveyed to him under the deed of trust. Recordation tax to be paid upon recordation of the deed is the greater of the amount bid at the sale or the assessed value of the property. The trustee must receipt for the proceeds. Any proceeds from the sale must be applied in the following order: to discharge the expenses of executing the trust, including the trustee’s commission; to discharge all taxes, levies, and assessments, with costs and interest, including the due pro rata thereof for the current year; and to discharge in the order of their priority, if any, the remaining debts and obligations secured by the trust instrument, and any liens of record inferior to the trust instrument under which sale is made, with lawful interest. Any residual proceeds shall be paid to the debtor or his assigns. Within six months of the sale, the trustee must file an accounting of sale, including the original note, and all vouchers for his expenses with the local commissioner of accounts. The secured party may sue the debtor or any guarantor for any deficiency between the amount of the proceeds of the sale applied to the note and the amount of indebtedness outstanding thereunder.

              G. Advantages and Disadvantages.

              In Virginia, a trustee’s sale is a relatively quick and efficient means of foreclosing on real property. Once the sale has been completed, the purchaser will own the property free and clear of other junior encumbrances (provided that the junior lienholders were properly notified). However, the lender must be cognizant of the procedural and timing requirements in order to properly coordinate the trustee’s sale, and the foreclosure process can be more expensive than acquir4ing the property by a deed in lieu.

                II. Deed in Lieu of Foreclosure.

                With a deed in lieu of foreclosure, the grantor transfers the fee simple title to the property encumbered by the deed of trust to the lender under the deed of trust. The lender contemporaneously releases the lien of the deed of trust and forgives or stipulates the liability of the obligors under the obligations secured by the deed of trust.

                A. Advantages. Acquisition by a deed in lieu can be advantageous to a debtor, as the process minimizes damage to the debtor’s reputation and credit rating by avoiding a formal foreclosure and creates substantial savings in costs, expenses, attorneys’ fees and trustee’s fees. The lender may find significant benefits as well, such as efficiency and the ability to obtain quick control of the property to effect its completion, rental or sale to a third party.

                  B. Disadvantages. A lender should be aware of the potential disadvantages to obtaining property by a deed in lieu of foreclosure. The lender will own the property subject to junior encumbrances (which are normally extinguished by a foreclosure sale) and all obligations of the former owner (including building code violations and environmental responsibilities). The debtor’s creditors may attack the sale as a fraudulent or voluntary conveyance if the value of the property greatly exceeds the value of the loan forgiven; and any guarantor that did not consent to the transaction may assert that the guarantors and debtor are released from any deficiency claim.

                    © 2011 WILLIAMS MULLEN ALL RIGHTS RESERVED

                     

                     

                     

                    Developments in Securities Law – February 2011

                    Recent posting including Security Law Updates for February at the National Law Review by Geoffrey R. Morgan, Michael H. Altman, and Jeffrey M. Barrett of Michael Best & Friedrich LLP:  

                    Final Rules

                    Say-on-Pay Voting Rules

                    On January 25, 2011, the SEC adopted final rules requiring public companies to conduct separate shareholder advisory votes on executive compensation and “golden parachute” compensation arrangements.  These rules were adopted substantially as proposed on October 18, 2010.  One notable difference from the proposed rules is a temporary exemption for smaller reporting companies so that these issuers will not be required to conduct either a say-on-pay or say-on-frequency vote until the first annual or other meeting of shareholders occurring on or after January 21, 2013.  This temporary exemption does not apply to shareholder advisory votes regarding golden parachute compensation of smaller reporting companies.  Because companies that have received TARP funds are required by U.S. Treasury regulations to have an annual say-on-pay vote, which is effectively the same as the say-on-pay vote under these rules, TARP recipients are exempt from the requirement to include an additional say-on-pay vote and a say-on-frequency proposal until their first meeting at which directors are elected after the company is no longer subject to the TARP restrictions.

                    The Dodd-Frank Act requires public companies to conduct say-on-pay and say-on-frequency votes for their first annual or other such meeting of shareholders occurring on or after January 21, 2011, regardless of whether final rules had been adopted by the SEC.  The final rules do not become effective until 60 days following publication in the Federal Register.  Companies must comply with the new rules concerning the golden parachute vote and disclosure with respect to any merger proxy statement (and certain other similar filings) filed on or after April 25, 2011.

                    Michael Best Comments

                    Say on Pay Could Make for a Rocky 2011 Proxy Season

                    While the say-on-pay rules just went into effect and the 2011 proxy season has just begun, we are seeing some interesting results that may signal a rocky season.  Two of the first 55 say-on-pay votes failed to gain majority approval.  While these votes are only advisory, companies whose annual meetings are later this year should take note that proxy advisory firms are playing a significant role in the process, especially for those companies whose say-on-pay proposals failed.  Also, given the prohibition on counting broker discretionary votes in say-on-pay and say-on-pay frequency proposals, a major source of votes upon which companies have historically relied, management recommendations on voting have less significance than in the past.

                    Companies are also required to put to a shareholder vote the frequency with which the say-on-pay vote should occur.  Shareholders must be given the choice of annual, biennial or triennial.  Shareholders are showing a distinct preference for more frequent review of executive compensation, with the early yet distinct trend towards annual referendums, rather than a biennial or triennial schedule that is favored by most companies.  Annual say on pay votes will likely require additional time and cost for companies to design and disclose executive pay programs.  There is a discrepancy between management’s recommendation and shareholder’s response to this item.  Nearly 60% of companies recommended a triennial vote, while a majority of shareholders at nearly 70% of companies have supported an annual vote.  This divergence was more significant for the largest U.S. companies.  Most of those companies that were successful in a biennial or triennial vote were controlled by insiders.

                    Proposed Rules & Final Rules

                    Net Worth Standard for Accredited Investors

                    On January 25, 2011, the SEC proposed amendments to its rules to conform the definition of “accredited investor” to the requirements of the Dodd-Frank Act.  Section 413(a) of the Dodd-Frank Act requires the definitions of “accredited investor” in the SEC’s rules to exclude the value of a person’s primary residence for purposes of determining whether the person qualifies as an “accredited investor” on the basis of having a net worth in excess of $1.0 million.  This change to the net worth standard was effective upon enactment by operation of the Dodd-Frank Act on July 21, 2010, but Section 413(a) also requires the SEC to revise its rules under the Securities Act of 1933 to reflect the new standard.

                    The change to the accredited investor definition is of significant importance for securities issuers as various exemptions for private or other limited offerings of securities under the Securities Act of 1933 and state “blue sky” laws depend on whether participants are “accredited investors.”  One of the bases on which individuals may qualify as accredited is having a net worth of at least $1.0 million, either alone or together with their spouse. Non-accredited investors who participate in private offerings under Rule 505 or Rule 506 of Regulation D must receive financial and other information that is not required to be given to accredited investors, and in offerings relying on Rule 506 there is a limit of 35 non-accredited investors.

                    Removal of Credit Rating References

                    On February 9, 2011, the SEC, pursuant to Section 939A of the Dodd-Frank Act, proposed rule amendments that would remove references to credit ratings in rules and forms promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934.  The focus of the proposal is to eliminate the use of credit ratings as a condition of “short-form” eligibility, which enables issuers to register securities “on the shelf” on a Form S-3 or F-3.  Currently, an issuer can use a Form S-3 or F-3 if it meets certain registrant requirements, including a requirement that, for at least one year, it has been a reporting company and has been filing its periodic reports in a timely manner, in addition to at least one of the applicable form’s transaction requirements.  One such transaction requirement allows an issuer to use a short-form registration statement for an offering of non-convertible securities, such as debt securities, provided that such securities be rated “investment grade” by at least one credit rating agency that is a nationally recognized statistical rating organization.  Under the proposed rules, the transaction eligibility requirement relating to the offering of non-convertible securities would be replaced with a new requirement, which would permit use of a short-form registration statement for primary offerings of non-convertible securities if the issuer has issued (as of a date within 60 days prior to the filing of the registration statement), for cash, more than $1 billion in non-convertible securities, other than common equity, through registered primary offerings over the last three years and otherwise meets the registrant requirements.  The proposed standard is modeled on the standard for determining whether an issuer is a “well-known seasoned issuer” based on its debt issuances, where it does not meet the public equity float requirement.

                    New Compliance & Disclosure Interpretations

                    Smaller Reporting Companies – On February 11, 2011, the SEC released new Q&A interpretations addressing how to determine whether an issuer is a smaller reporting company as of January 21, 2011.  If an issuer is a smaller reporting company as of that date, the issuer will be entitled to rely on the delayed phase-in period for holding say-on-pay and say-on-frequency votes.  An issuer’s status as a smaller reporting company is based on such issuer’s public float or annual revenues at the end of the second fiscal quarter of 2010. A change in status, if any, based on the issuer’s second fiscal quarter of 2010 results is effective on the first day of such issuer’s first quarter of 2011, regardless of whether such issuer has filed a report with the SEC indicating its new status.

                    Sec Releases & Policy Statements

                    No relevant Releases or Policy Statements.

                    © MICHAEL BEST & FRIEDRICH LLP