Tag: Financial Services Law

Seeking Corporate Dissolution: One Way to Turn Up the Heat on a Deadbeat Debtor

Posted in the National Law Review an article by Jeffrey M. Schwartz of Much Shelist Denenberg Ament & Rubenstei P.C. regarding a seldom-used remedy that can significantly increase your chances of recovering a debt:

Put yourself in the place of a creditor. One of your customers, an Illinois corporation, owes you money. The customer does not dispute the debt and has even admitted it in writing. However, you can’t get the customer to pay. You have tried everything. First, you are told “the check is in the mail” and of course, it does not show up. The customer then agrees to a payment plan but fails to make the required payments. Finally, the customer promises to “pay next month when we have the money.” Still no check. In a last ditch effort, you call repeatedly, but the customer has now gone incommunicado. It has become obvious that the only way to collect the debt is to file a lawsuit.

You are hesitant, however, because of the time and expense it will take to obtain and enforce a judgment. After all, the customer will likely go to great lengths to delay the lawsuit and hold you at bay for as long as possible. From the customer’s point of view, the worst case scenario is that it will have to pay you the money it has already admitted it owes. Is there anything you can do to minimize the time and expense of obtaining and enforcing a judgment?

You may want to consider a seldom-used remedy that can significantly increase your chances of recovering a debt. Under the Illinois Business Corporation Act, a creditor may seek to have its claims against an Illinois corporation satisfied by bringing an action for dissolution in the state’s circuit court. By adding a cause of action for corporate dissolution to a collection lawsuit, creditors may increase pressure on the debtor to pay what is owed or resolve the dispute in a timely, cost-effective manner. In essence, this alternative remedy can change the dispute from a simple beach of contract or collection matter to a scenario where the customer risks losing control of the corporation and must fight for its very existence.

The Illinois Business Corporation Act, which has little case law interpreting it, does not require much. The statute provides that in an action brought by a creditor, a circuit court in Illinois may dissolve a corporation if it is established that:

  1. The creditor’s claim has been reduced to judgment, a copy of the judgment has been returned unsatisfied and the corporation is insolvent; or
  2. The corporation has admitted in writing that the creditor’s claim is due and owing, and the corporation is insolvent.

(Note: Many other states have similar statutes that allow a creditor to satisfy a claim against a corporation through dissolution or liquidation. Accordingly, if your customer is not an Illinois corporation, you should check to see if its state of incorporation has a similar statute.)

One advantage of using this statute is that it does not actually require a creditor to obtain a judgment. The creditor need only show that the debtor has admitted in writing that it owes the money and that the corporation is insolvent. The written admission can come in a variety of forms. For example, the debtor may have sent a letter or e-mail admitting that it owes the debt or may have acknowledged the debt in a forbearance or settlement agreement. In addition, the admission need not be made directly to the creditor. According to People Ex Rel. Day v. Progress Ins. Ass’n, a 1955 Illinois Appellate Court decision, it may be sufficient that the indebtedness is recognized in the debtor’s books and records. Furthermore, the insolvency requirement is satisfied if the corporation is “unable to pay its debts as they become due in the usual course of its business,” as stated in the Illinois Business Corporation Act.

The statue also allows the circuit court, as an alternative to dissolution, to (1) appoint a custodian to manage the business and affairs of the corporation to serve for the term and under the conditions prescribed by the court; and (2) appoint a provisional director to serve for the term and under the conditions prescribed by the court. Like the prospect of dissolution itself, these alternatives put the debtor at risk of losing control of the company.

While your customer may be willing to take the chance that a judgment will be entered against it after extensive litigation and delay, it may not be willing to risk dissolution or loss of control of the corporation. Therefore, adding a count for corporate dissolution to a collection lawsuit can alter the playing field and give you—the creditor—significant negotiating power to resolve the dispute quickly and on better terms.

© 2011 Much Shelist Denenberg Ament & Rubenstein, P.C.

 

 

NYC Condo Refinance Collapses Because There Was No "Meeting of the Minds"

Recently posted in the National Law Review an article by Eric S. O’Connor of Sheppard Mullin Richter & Hampton LLP wherein  plaintiffs sought damages arising out of their attempt to refinance a mortgage loan with the defendant bank:

In Trief v. Wells Fargo Bank, N.A., Index No. 105280/09, — N.Y.S.2d — (Sup Ct, NY County, Apr. 4, 2011) (“Trief”), the plaintiffs sought damages arising out of their attempt to refinance a mortgage loan with the defendant bank (the “Bank”), for breach of contract and violation of New York’s Unfair and Deceptive Practices Act, N.Y. General Business Law (“NYGBL”) § 349. Justice Charles Edward Ramos granted the Bank’s motion for summary judgment on both counts. The parties actually proceeded to closing when plaintiff walked away from the refinancing of a luxury midtown condominium located at 15 West 53rd Street, New York, NY – seemingly over a $518.75 dispute.

The main lesson is that all parties, especially when communicating via more informal modes of communications like email, must clarify and confirm an “agreement on all essential terms” or else a valid contract will not be formed.

The facts – negotiation, informal communications, the exchange of standard loan forms, etc… – follow a seemingly common pattern. A mortgage consultant from the Bank filled out the refinance application on the Triefs’ behalf by telephone and then sent an e-mail attaching a Good Faith Estimate of Settlement Charges (the “GFE”). The GFE proposed a 5.125% interest rate and a standard provision indicating that the “fees listed are estimated – the actual charges may be more or less.” The cover email asked to “let me know if you would like me to lock you in for 60 days”, which Mr. Trief responded “sure.” After a small dispute about the rate, the Bank faxed a Conventional Commitment Letter (the “Letter”) to the Triefs confirming the rate and other details. Despite language in the Letter that “You must sign and return this commitment letter within that period to ensure receiving the terms specified”, neither party signed the Letter. At the scheduled closing, the Triefs refused to proceed because the Bank sought to charge them a rate lock extension fee of $518.75, which the Triefs claim was never negotiated or agreed to.

The main issue was whether a contract was formed. The Court explained the classic rules that a plaintiff must establish an offer, acceptance of the offer, consideration, mutual assent, and an intent to be bound. Kowalchuk v. Stroup, 61 A.D.3d 118, 121 (1st Dept 2009).  Mutual assent means a “meeting of the minds” and must include agreement on all essential terms. Id. The Court held that there was not a meeting of the minds on all of the essential terms of a final contract for refinancing. The two key pieces of evidence – the email from the Bank asking to “let me know if you would like me to lock you in for 60 days” and the standard GFE language that terms were subject to change – were only seeking an acceptance to lock in the rate for a fixed period of time, rather than a final agreement to refinance. Further, the Real Estate Settlement Procedure Act(“RESPA”) shows that the legislature did not intend for the GFE to bind a lender to a final loan agreement. See 24 CFR § 3500.7 [a], [g] (the “GFE is not a loan commitment. Nothing in this section shall be interpreted to require a loan originator to make a loan to a particular borrower.”).

Finally, the Court also rejected the Triefs claim under NYGBL § 349. A claim for violation of GBL § 349 is based upon consumer-oriented conduct that is materially misleading, causing a plaintiff injury. The Court held that the Triefs failed to even identify consumer-oriented conduct on the part of the Bank because private contract disputes, unique to the parties, generally do not fall within the scope of the statute. The Triefs failed to demonstrate injury because they refused to close on the loan refinancing and did not pay any fees to the Bank.
Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.

Troubled Loan Workouts: Qualified Professionals Can Help Maximize Recovery for All Parties

Posted in the National Law Review an article by Norman B. Newman of Much Shelist Denenberg Ament & Rubenstein P.C. regarding workout of a financially troubled loans:

The workout of a financially troubled loan requires the participants—typically the lender, the borrower and the guarantors—to be well versed in legal and business principals, coupled with an ability to understand the emotional aspects of the situation. The primary goal of a troubled loan workout is to maximize the recovery to all parties involved. That end result is best achieved when each party is represented by qualified professionals, including a loan officer who is familiar with the situation, as well as experienced attorneys and workout consultants. Collectively, these resources offer a vast network of appraisers, real estate and business brokers, buyers, prospective lenders and other contacts—all of whom are familiar with financially troubled business matters.

From the lender’s side, a loan workout officer will bring to the table a thorough understanding of the loan documents and know what collateral has been pledged, as well as the extent of the perfection of the security interests granted to the lender. The loan officer will be able to communicate with the borrower and the guarantors with respect to the existing defaults under the loan documents. This individual will also know the lender’s rights in light of the default and whether the lender is choosing to presently exercise its rights under the loan documents or reserve exercising them until a future date.

From a legal prospective, it is essential that all parties involved in a troubled loan workout be represented by attorneys experienced in handling financial distress matters. The lender’s attorney will review the loan documents, examine collateral perfection issues and assist in providing updated UCC, tax lien and judgment lien searches. This attorney will also be able to advise the lender as to the various remedies available in the exercise of its rights against the borrower and the guarantors, including in-court and out-of-court options.

The other parties should also turn to legal counsel for advice regarding their rights, remedies and obligations under the operative documents. Attorneys for the borrower and guarantors will advise their clients how best to cooperate with the lender in a consensual workout scenario or what defenses might be available in an adversarial situation. This advice will also cover in-court and out-of-court options, including the availability of bankruptcy relief as part of a consensual loan workout.

Assuming the lender does not need to take immediate action to get control over or liquidate its collateral, most troubled loan workouts involve some period of forbearance that affords the borrower additional time to resolve its financial problems. Under a limited forbearance arrangement, the lender gives up little, while both the borrower and the lender have an opportunity to pursue various benefits. At this stage, the parties should involve experienced workout consultants who, for example, will help analyze the borrower’s business and provide advice regarding the profitability and viability of the enterprise. They often help prepare short-term and long-term cash flow projections and budgets or test such projections and budgets when they are prepared by the borrower. Additionally, they typically play a role in determining the best way to maximize the recovery to all parties, whether it be a reorganization of the borrower, a sale or an orderly liquidation of the borrower’s assets. If a restructure or reorganization is the chosen solution, workout consultants will help determine what additional funds might be necessary to accomplish the desired result.

The workout of a financially troubled loan involves complex legal and business issues, as well as the emotions of the business owners or the guarantors of the borrower’s indebtedness. Partnering with experienced attorneys and other workout professionals is an essential step towards navigating these difficult waters and ensuring a successful outcome for all of the parties involved.

© 2011 Much Shelist Denenberg Ament & Rubenstein, P.C.

Justice Department Investigation of S&P

Recently posted in the National Law Review an article by Jared Wade of Risk and Insurance Management Society, Inc. (RIMS) regarding the Justice Department investigating S&P:

The Justice Department is investigating Standard & Poor’s for improperly rating the garbage mortgage-backed securities that tanked the economy once the world caught on that they were toxic assets.

The anonymous folks who leaked this info to the press claim that the inquiry began prior to S&P’s downgrade of U.S. debt, but many have speculated that the fervor and depth of the probe has ratcheted up since the nation lost its AAA-status.

Either way, the law dogs are — finally — poking around in the ratings world.

The Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns.

It is unclear if the Justice Department investigation involves the other two ratings agencies, Moody’s and Fitch, or only S.& P.

Any inquiry should of course involve looking at all three. Each overrated the used diaper mortgage-backed securities to a baffling degree. Whether or not it was incompetence or something more insidious is really the only question, I have. I presume they are capable of both.

But if this investigation focuses solely on S&P then it falls even more into how one talking head on MSNBC’s The Daily Rundown described it: more of a Washington story than a Wall Street one.

Honestly, the only weird thing about hearing today about an investigation going on right now is that it was something I expected to hear in 2008.

In related news, and not just to toot our own horn, but I would feel remiss not to mention that our Risk Management magazine cover story this month was titled “The Future of Ratings” and examines “how rating agencies gained so much power, helped tank the economy and figure into the future of risk assessment.”

I’m not going to pretend that I knew just how much play rating agencies would be getting in August when I commissioned the piece a few months ago. I’m many things, but clairvoyant is not one of them. But the piece speaks to many of the questionable issues surrounding the ratings world that have been curiously dormant in the mainstream media for years until recently.

A wonderful writer, Lori Widmer, did a fine job so please do give it a read.

Risk Management Magazine and Risk Management Monitor. Copyright 2011 Risk and Insurance Management Society, Inc. All rights reserved.

http://www.natlawreview.com/article/fda-issues-draft-guidance-510k-device-modifications-new-emphasis-potential-impact-modificati

Recently posted in the National Law Review an article by  Sylvie A. Durham, Genna Garver and Dmitry G. Ivanov of Greenberg Traurig, LLP about a dismissed a lawsuit brought by noteholders under a New York law  indenture 

The U.S. District Court of the Southern District of New York dismissed a lawsuit brought by noteholders under a New York law indenture against the co-issuer of the notes and collateral manager for breach of contract because the noteholders failed to comply with the “limitation of suits” provision in the indenture.

The court stated that the allegation of the noteholders that they did not receive proper distribution amounts on the notes constituted an “event of default” under the indenture, and as such “falls squarely within the limitation on suits clause.” However, since the noteholders did not comply with all the contractual prerequisites for bringing a lawsuit set forth in the “limitation of suits” provision of the indenture, the court did not allow them to proceed with breach of contract claims against the co-issuer and collateral manager. However, the court did not dismiss the breach of contract claims against the indenture trustee based on the same “no-action” clause, since compliance with such clause “would require [noteholders] to demand that the [indenture trustee] initiate proceedings against itself to rectify the alleged error.”

A copy of the case can be accessed here.

 ©2011 Greenberg Traurig, LLP. All rights reserved.

Unclaimed Property Audits: No Laughing Matter

Posted on August 8, 2011 in the  National Law Review an article about several  states’ increased focus on unclaimed property and companies needing to be proactive in monitoring and improving their unclaimed property compliance practices.   This article was written by Marc J. Musyl, Micah Schwalb and Sarah Niemiec Seedig of Greenberg Traurig, LLP

Failure to Comply with Unclaimed Property Laws Can Cost a Company Millions in Interest and Penalties Alone

Many states continue to turn to unclaimed property as a source of revenue in the face of budget shortfalls. During the last two years, some state regulators have pursued non-traditional types of unclaimed property and state legislatures have revised their unclaimed property statutes to reduce dormancy periods, effectively causing companies to remit more unclaimed property in a shorter time frame. In New York, for example, the legislature lowered dormancy periods from five to three years for a number of different asset classes typically held by financial institutions.

Acting upon provisions in the Dodd-Frank Act, the SEC recently proposed to expand rules that would require brokers and dealers to escheat sums payable to security holders. Failure to comply with these laws can mean millions of dollars in interest and penalties for a company, which can negatively impact a company’s bottom line. For example, a growing number of life insurers are being audited by multiple states to assess their compliance with unclaimed property laws. One state regulator estimated that these life insurer audits could transfer “north of $1 billion” from the audited life insurers into the pockets of consumers, in the form of benefit payments, and revenue to the states, in the form of unclaimed property, interest and fines.

Unclaimed Property and State Audits

Unclaimed property laws require the remittance of certain types of property to the state for safekeeping if a business is unable to contact the owner of that property after a specified period, known as the dormancy period. Each state has its own set of laws that set forth the types of property subject to escheat, the dormancy period for each category of property, and reporting rules. Examples of items that can constitute unclaimed property include unused gift cards, uncashed payroll checks, uncashed stock dividend checks, abandoned corporate stock, and abandoned trust funds.

States have the ability to audit companies to determine their compliance with the unclaimed property laws. If an audit reveals improperly held or abandoned assets, states can seize the property, hold it in trust for a rightful owner, and impose costs, fines, and interest against the offending entity. In severe cases, the interest and fines can exceed the amount of unclaimed property at issue. These audits are often conducted by third-party auditors paid on a contingency basis, thus creating an incentive for them to maximize the unclaimed property uncovered. What’s more, the lack of a statute of limitations on escheat in most jurisdictions can lead to decades of accumulated unclaimed property liabilities.

35 States: How Does an Audit Get So Large?

Typically, an audit begins when a state engages a third-party auditor and provides a company with notice that it is under audit. The third-party auditor, being paid on a contingency basis, can expand its compensation by adding additional states to the audit. If only one state has authorized an unclaimed property audit, the thirdparty auditor only receives a percentage of the unclaimed property that was required to be reported to that state. However, if 20 states have authorized the audit, the third-party auditor now receives a percentage of the unclaimed property that should have been reported to 20 states, significantly increasing the auditor’s overall compensation.

This snowball effect is exactly what happened to some life insurers, and what could happen to any company. For example, the State of California initiated anaudit of John Hancock in 2008. This audit was undertaken by Verus Financial L.L.C. Fast forward three years to 2011, and Verus has now been authorized by 35 states and the District of Columbia to investigate and audit numerous insurance companies. These audits center around life insurers’ claims handling processes. The Social Security Administration publishes a Death Master File, updated weekly, which can be used to verify deaths. Insurers have been using the Death Master File to find dead annuity holders in order to stop payments. On the flip side, the insurers have not been using the Death Master File to find deceased policy insureds in order to pay the policy beneficiaries. The states and Verus have seized upon this disparate use of the Death Master File in their investigation of whether the funds should have been paid out to beneficiaries, in the form of benefit payments, or the states, in the form of unclaimed property.

Why Should I Be Concerned?: John Hancock as an Example

As a result of the Verus audit discussed above, John Hancock reportedly negotiated a global resolution agreement with 29 states which took effect June 1. As part of John Hancock’s settlement with the State of Florida, John Hancock will pay over $2.4 million in investigative costs and legal fees to Florida, and will establish a $10 million fund to pay death benefits and interest owed to beneficiaries. The amounts owed to beneficiaries that cannot be located will be turned over to Florida’s unclaimed property division. In addition, John Hancock has agreed to change its claims-handling procedures. Throughout the process, John Hancock has maintained that it has not violated the law. Given the number of insurance companies currently under audit, news of further settlements should be expected in the future.

In light of success with life insurers, recent legislative changes and continued state budget crunches, it is reasonable to expect an expansion of audits to other industries. It is widely estimated that a significant percentage of companies are not in full compliance with unclaimed property laws. There is no statute of limitations in most jurisdictions, as mentioned above, so the look-back period can be fairly lengthy and cover periods for which the company no longer has adequate records. The auditor may estimate the unclaimed property liability for such periods, which can lead to a company paying more than it would have otherwise owed. Further, interest and penalties can be severe. For example, in California interest is calculated by state statute at 12% per annum from the date the property should have been reported.

Taking Control of Unclaimed Property Compliance

As a result of the states’ increased focus on unclaimed property, companies need to be proactive in monitoring and, if necessary, improving their unclaimed property compliance practices. As a preliminary step, companies should determine whether or not they are currently in compliance with the unclaimed property laws. Many states have voluntary compliance programs for companies that are out of compliance. Oftentimes, by entering into a voluntary disclosure agreement with the appropriate authorities, a company can retain control of the process, limit the look-back period (remember, there is often no statute of limitations!), and limit the penalties and/or interest that may be owed for non-compliance. Typically, these voluntary programs are not available to companies once they have been selected for audit. Analyzing a target’s unclaimed property liability exposure should also be part of the due diligence process in a potential acquisition. Attention to unclaimed property compliance now can save valuable company resources later.

 

The Illinois Civil Union Law and Its Impact on Estate Planning

Recently posted in the National Law Review an article by Gregg M. Simon of Much Shelist Denenberg Ament & Rubenstein P.C. on Civil Unions and Estate Planning:

On June 1, 2011, the Illinois Religious Freedom Protection and Civil Union Act went into effect. The new law provides a legal procedure for the certification and recognition of civil unions between same-sex and opposite-sex individuals. This new Illinois law has numerous real and potential effects on many areas of the law, including estate planning—effects that may not be limited to the parties in a civil union. Much Shelist spoke to Gregg M. Simon, Chair of the firm’s Wealth Transfer & Succession Planning practice, about some of the estate planning issues being raised by the new law.

Much Shelist: Can you give us a brief overview of the Illinois civil union law?

Gregg Simon: For a number of years, advocates of the legal recognition of same-sex couples in Illinois had been working with the state legislature to pass some form of civil union or marriage law. On the other side, certain religious and other groups had expressed concerns about the scope of such legislation and how it might be applied or enforced. Eventually, compromise language was worked out that, while not fully addressing all concerns of all parties, contained provisions that enabled passage of the legislation in the Illinois House and Senate on December 1, 2010. In February 2011, Governor Pat Quinn signed the law, which went into effect on June 1, 2011.

As written, the law is fairly short and direct. It provides procedures for the certification, registration and dissolution of a civil union and entitles parties entering into a civil union the same legal obligations, responsibilities, protections and benefits that are afforded to married spouses. In essence, where “spouse” appears in existing and future Illinois statutes, administrative rules, common law, or other sources of civil or criminal law, the word now also refers to a party in a civil union. These “default” rights and obligations can include the right to make health care decisions (unless, as with married couples, a guardian for the disabled partner has been appointed or an agent under a health care power of attorney has been named), the right to dispose of the remains of a deceased partner, various inheritance and property rights, creditor protections, and so on.

Civil unions in Illinois are not just for same-sex couples. Opposite-sex couples can also enter into a civil union, although they should carefully weigh the known and potential advantages and disadvantages of a civil union versus marriage. Likewise, the rules prohibiting certain civil unions are generally similar to those that prohibit marriage between specific individuals. For example, an individual is not allowed to enter into a civil union if he or she is in an existing civil union or marriage, and closely related individuals cannot enter into a civil union.

MS: From an estate planning perspective, what should couples be aware of?

GS: With respect to the Illinois civil union law, there are three broad concepts relating to estate planning that people should keep in mind. First, it should be understood that the law could affect almost anyone, not just the parties in a civil union. For example, let’s assume that a parent has drawn up a will prior to the effective date of the Illinois civil union law that designates his or her child and that child’s “spouse” as beneficiaries. Now let’s imagine that at some point in time the child enters into a civil union with his or her same-sex partner. Under a strict reading of the law, that same-sex partner would be treated as a spouse and would therefore qualify for the beneficial interest designated in the will. That might be the intent of the parent whose assets are to be distributed—or it might not.

Second, the civil union law raises almost as many issues as it resolves, many of which will be the subject of legal disputes until a clear body of case law and precedent has been established. Using the same example, let’s imagine that the parent was perfectly happy with his or her child’s same-sex partner receiving a beneficial interest, but failed to clarify in the will that its terms applied equally to a spouse and a party to a civil union (particularly if the parent died before the civil union legislation was enacted). Let’s now imagine that the child’s siblings do not want the same-sex partner to receive a portion of the assets. Since the will only used the word “spouse,” the siblings could take legal action to try to deny the same-sex partner his or her portion of the beneficial interest, claiming that the use of the word “spouse” (and failure to change the language of the will after June 1, 2011) meant that the parent intended only for an opposite-sex, married partner of the child to be eligible to receive any assets.

These examples are not so farfetched. After Illinois law was changed in the early 20th century so that adopted children were treated the same as natural-born children, almost 100 years of related litigation ensued. These cases focused on whether an adopted child was included when a testator used the terms “children” or “issue,” particularly when the document was executed before the law was changed (i.e., at a time when an adopted child would not have been included within those terms).

The takeaway is that clarity is paramount when it comes to estate planning. In order to ensure that your wishes are carried out as you intend, you should review all applicable documents with experienced legal counsel and ensure that any potentially ambiguous language or terms are clarified and reflect current legal realities.

A third important concept is that the federal Defense of Marriage Act (DOMA) and federal tax laws do not recognize same-sex civil unions or marriages, even those that are recognized by the various states. This raises a whole host of issues regarding estate and gift taxation, Social Security benefits and other federal-level treatment of individuals in civil unions. Many of these issues are being litigated right now.

MS: What are some of the key conflicts between state and federal marriage and tax laws?

GS: DOMA defines “marriage” as a legal union between one man and one woman, and defines “spouse” as a person of the opposite sex who is a husband or wife in a marriage. DOMA further says that no state can be required to honor the law of another state regarding legal relationships that are treated as a marriage between persons of the same sex. In essence, DOMA denies same-sex couples all of the federal benefits of marriage, even if the couple was married or entered into a civil union in a state that recognizes such relationships.

From the perspective of estate and tax planning, this means that same-sex couples are denied the following, among other benefits: the estate tax marital deduction for assets passing outright to a spouse, or to certain qualifying marital deduction trusts and qualified domestic trusts; portability of exemption amounts; the gift tax marital deduction; gift splitting, or the right to treat gifts made by either spouse as made equally by both spouses; and, for the generation-skipping transfer tax, treatment of the same-sex parties as being in the same generation. Opposite-sex couples in a civil union may also face some, if not all, of these issues, particularly in states that do not recognize common-law marriage.

On the other hand, there are some transfer rules that apply to married, opposite-sex couples that, by not applying to same-sex couples, might produce favorable results. These include (1) the option of setting up a grantor retained income trust, which typically does not work for married couples, and (2) adding certain provisions to a qualified personal residence trust that are not permissible for married same-sex couples. Sales of remainder interests can similarly work for domestic partners.

Additional issues arise when a same-sex couple moves to another state. How will that jurisdiction interpret the civil union law of Illinois, particularly in those states with laws that specifically recognize legal relationships only between one man and one woman?

MS: Will legal challenges to DOMA and other laws help clarify this picture?

GS: In the long run, the answer is yes. There are a number of court cases, perhaps the best known of which is Edith Schlain Windsor v. United States, that are challenging the legality of DOMA and its application on a variety of issues. The Obama administration and the Office of the U.S. Attorney General, which are charged with enforcing the law, have stated that they do not believe DOMA is constitutional as applied to the cases that have challenged its constitutionality and have declined to defend it in these cases. Whether or not DOMA or any of its component parts are upheld as constitutional, the decisions in these cases are bound to add clarity to the situation.

However, “clear” does not always mean less complex. Whether or not DOMA is overturned, the decisions made by the courts will add new twists in the area of estate planning. For example, an older, opposite-sex couple in Illinois may choose to enter into a civil union rather than a marriage, in order to continue receiving Social Security benefits that derive from prior marriages. If DOMA falls, and their civil union is then treated as a federally recognized marriage, they could stand to lose a significant portion of their Social Security benefits.

Given all of the uncertainties, individuals who are considering a civil union should work closely with their attorneys to review their current estate planning documentation. Ambiguous language should be revised and clarified, and new or different tools (trusts, etc.) may be advisable in light of the new legal and tax landscape. Estate plans are “living” things, if you will; as the environment changes, they should be reviewed regularly and adjusted accordingly.

© 2011 Much Shelist Denenberg Ament & Rubenstein, P.C.

Healthcare Alert: U.S. Announces Process for $3.8B in CO-OP Funds

Recently posted in the National Law Review an article by Mark E. Rust of Barnes & Thornburg LLP about the announcement that Medicare and Medicaid Services (CMS) will begin accepting applications for Consumer Oriented and Operated Plan (CO-OP) Start-Up Loans and Solvency Loans on Oct. 17, 2011 :

According to a recently released Federal Opportunity Announcement (FOA), TheCenter for Medicare and Medicaid Services (CMS) will begin accepting applications for Consumer Oriented and Operated Plan (CO-OP) Start-Up Loans and Solvency Loans on Oct. 17, 2011. Section 1322 of the Patient Protection and Affordable Care Act (PPACA) establishes the CO-OP program to foster the creation of nonprofit health insurance issuers. The CO-OP program will dispense $3.8 billion in Start-Up Loans and Solvency Loans to providers and buyers who sponsor new insurers regionally.

The FOA is subject to change pending the CO-OP final rule. Comments on the proposed CO-OP rule are due on Sept. 16, 2011.

The CO-OP program is designed to foster the creation of new consumer-governed, private, nonprofit health insurance issuers, known as CO-OPs. CO-OPs will offer plans under the Affordable Insurance Exchanges (Exchanges) by Jan. 1, 2014. Generally, CMS will provide Start-Up Loans for all costs associated with developing the CO-OP, and Solvency Loans for all state registered reserves (Loans) to CO-OP applicants in each state. The loans are awarded for the purpose of CO OP development and meeting state solvency requirements. The FOA provides general detail regarding the basis upon which loans are awarded.

FOA Application Timeline

Under the FOA, CO-OP applicants must immediately submit a Letter of Intent indicating intent to apply for joint Start-Up Loans and/or Solvency Loans. The CMS underscores the time urgency of application because the agency expects to provide notice of loan awards by Jan. 12, 2012 so that CO OP applicants can be prepared to accept contracts in late 2013. Because of this deadline, the first round of applications are due by Oct. 17, 2011.

Successful CO-OP applications receive a Notice of Award and a Loan Agreement. CO-OP applicants may request reconsideration of loan application to CMS within 30 days of receiving determination notice. CMS notes that redetermination results in a final decision that is not subject to further administrative review or appeal.

FOA CO-OP Loan Application Criteria

Generally, CMS will look for efficiencies and evaluate whether the business plan and budget is sufficient, reasonable, and cost effective to support activities proposed in the CO-OP application. CMS will review applications on a base total of 100 points weighted from five general criteria including: (1) statutory preferences (16 points); (2) project narrative (4 points); (3) business plan (62 points); (4) government and licensure (10 points); and (5) feasibility study (8 points). The feasibility study must be supported by an actuarial analysis.

FOA Loan Details

Both Loans are non-recourse and provided at a low interest rates. Start-Up Loans will be prepaid five years from startup and charged an interest rate equal to the average interest rate on marketable Treasury securities of similar maturity minus one (1%) percentage point (provided that interest shall not be less than 0 percent) on the amount of the drawdown. Solvency Loans will be repaid in 15 years and charged an interest rate equal to the average interest rate on marketable Treasury securities of similar maturity minus two (2%) percentage points (provided that the interest shall not be less than 0 percent) on the amount of the drawdown.

© 2011 BARNES & THORNBURG LLP

 

 

 

 

 

 

 

Unsecured Creditors Beware! The Western District of Texas Bankruptcy Court Declares an Unsecured Creditor Cannot Have Its Cake (Unsecured Claim) and Eat It Too (Post-Petition Legal Fees)

Recently posted in the National Law Review an article by Evan D. Flaschen, Renée M. Dailey, Mark E. Dendinger of Bracewell & Giuliani LLP about the issue of whether an unsecured creditor can recover post-petition legal fees under the Bankruptcy Code:

Bankruptcy courts have long debated the issue of whether an unsecured creditor can recover post-petition legal fees under the Bankruptcy Code. In the recent decision of In re Seda France, Inc. (located here(opens in a new window)), Justice Craig A. Gargotta of the United States Bankruptcy Court for the Western District of Texas denied an unsecured creditor’s claim for post-petition fees. In doing so, the Court has once again left the unsecured creditor with a bad taste in its mouth by declaring that an unsecured creditor seeking post-petition fees is asking permission to have its cake (a claim for principal, interest and pre-petition legal fees under applicable loan documents) and eat it too (a claim for post-petition legal fees).

Proponents of the view that an unsecured creditor cannot recover post-petition legal fees point to section 506(b) of the Bankruptcy Code, which allows as part of a creditor’s secured claim the reasonable attorneys’ fees and costs incurred during the post-petition period, and note the Bankruptcy Code is silent on anunsecured creditor’s right to post-petition legal fees. Essentially, the argument is since Congress provided for post-petition fees for secured creditors, it could have explicitly provided for post-petition fees for unsecured creditors but chose not to. Proponents of the alternative view cite the Second Circuit decision United Merchants and its progeny, where those courts refused to read the plain language of section 506(b) as a limitation on an unsecured creditor’s claim for recovery of post-petition legal expenses. The theory is that while the Bankruptcy Code does not expressly permit the recovery of an unsecured creditor’s claim for post-petition attorneys’ fees, it does not expressly exclude them either. The basic tenant is that if Congress intended to disallow an unsecured creditor’s claim for post-petition legal fees it could have done so explicitly.

In Seda, Aegis Texas Venture Fund II, LP (“Aegis”) timely filed a proof of claim in Seda’s Chapter 11 bankruptcy case claiming its entitlement to principal, interest and pre-petition attorneys’ fees under its loan documents with Seda as well as post-petition attorneys’ fees for the duration of the case. Aegis made various arguments in support of the allowance of its post-petition legal expenses including: (1) the explicit award of post-petition fees to secured creditors under section 506(b) does not mean that such a provision should not be implicitly read into section 502(b) (i.e., unim est exclusion alterius (“the express mention of one thing excludes all others”) does not apply), (2) the United States Supreme Court decision in Timbers does not control as Timbers denied claims of anundersecured creditor for unmatured interest caused by a delay in foreclosing on its collateral, (3) the right to payment of attorneys’ fees and costs exists pre-petition and it should be irrelevant to the analysis that such fees are technically incurred post-petition, (4) because the Bankruptcy Code is silent on the disallowance of an unsecured creditor’s post-petition attorneys’ fees, these claims should remain intact, and (5) recovery of post-petition attorneys’ fees and costs is particularly appropriate where, as in Seda, the debtor’s estate is solvent and all unsecured creditors are to be paid in full as part of a confirmed Chapter 11 plan.

The Seda Court rejected Aegis’ arguments and held that an unsecured creditor is not entitled to post-petition attorneys’ fees even where there is an underlying contractual right to such fees and unsecured creditors are being paid in full. With respect to Aegis’ argument on the proper interpretation of sections 506(b) and 502(b), the Court cited the many instances in the Bankruptcy Code where Congress expressed its desire to award post-petition attorneys’ fees (e.g., section 506(b)), and found that Congress could have easily provided for the recovery of attorneys’ fees for unsecured creditors had that been its intent. Regarding Aegis’ argument that Timbers does not control, the Court held that in reaching its decision on the disallowance of a claim for unmatured interest the Timbers Court found support in the notion that section 506(b) of the Bankruptcy Code does not expressly permit post-petition interest to be paid to unsecured creditors. The SedaCourt held this ruling should apply equally to attorneys’ fees to prohibit recovery of post-petition fees and expenses by unsecured creditors. The Court further held that section 502(b) of the Bankruptcy Code provides that a court should determine claim amounts “as of the date of the filing of the petition,” and therefore attorneys’ fees incurred after the petition date would not be recoverable by an unsecured creditor. In response to Aegis’ argument that non-bankruptcy rights, including the right to recover post-petition attorneys’ fees should be protected, the Seda Court noted that the central purpose of the bankruptcy system is “to secure equality among creditors of a bankrupt” and that an unsecured creditor’s recovery of post-petition legal fees, even based on a contractual right, would prejudice other unsecured creditors. The Court held this is true even in the case where the debtor was solvent and paying all unsecured creditors in full. The Court noted that a debtor’s right to seek protection under the Bankruptcy Code is not premised on the solvency or insolvency of the debtor and, therefore, the solvency of the debtor has no bearing on the allowance of unsecured creditors’ post-petition legal fees.

Seda is the latest installment in the continued debate among the courts whether to allow an unsecured creditor’s post-petition attorneys’ fees. The Seda Court is of the view that an unsecured creditor cannot recover post-petition legal fees for the foregoing reasons, most notably that the Bankruptcy Code is silent on their provision and public policy disfavors the recovery of one unsecured creditor’s legal expenses incurred during the post-petition period to the prejudice of other unsecured creditors. Depending on the venue of the case, there will undoubtedly be many more instances of unsecured creditors seeking recovery of their post-petition attorneys’ fees in a bankruptcy case until the Supreme Court definitively rules on the issue. Until then, keep asking for that cake . . . .

© 2011 Bracewell & Giuliani LLP

ABA's Second Annual National Institute on Consumer Financial Basics 9/19-9/20, 2011

The National Law Review wants to remind you that the ABA’s Second Annual National Institute on Consumer Financial Basics is taking place on September 19 – 20, 2011 at Boston University Center for Finance Law & Policy, Boston, MA.


Description

Facing the most comprehensive revision of federal consumer financial services (CFS) law in 75 years, even experienced consumer finance lawyers might feel it is time to get back in the classroom. This live meeting is designed to expose practitioners to key areas of consumer financial services law, whether you need a primer or a refresher. And importantly, it provides the framework and structure, to help you come to grips with the Dodd-Frank Act and the issues that Dodd-Frank and its Consumer Financial Protection Bureau will present in your practice.

In the pressure cooker of today’s financial services industry, the breadth and complexity of the issues you are facing will overwhelm any seminar on recent developments. It is time to take a step back and think through some of these complex issues with a faculty that combines decades of practical experience with law school analysis. The classroom approach is used to review the background, assess the current policy factors, step into the shoes of regulators, and develop an approach that can be used to interpret and evaluate the scores of laws and regulations that affect your clients.

 Program Focus

This program will explain each of the major sources of regulation of consumer financial products in the context of the regulatory techniques and policies that are the common threads in a complex pattern, including: 

  • Price regulation and federal preemption of state price limitations
  • Disclosure and transparency affecting consumer understanding and market operation
  • Regulating the “fairness” of financial institution conduct
  • Privacy and security of consumer data and ID Theft
  • Consumer reporting: FCRA & FACTA
  • Fair lending and fair access to financial services
  • Remedies: regulators and private plaintiffs

 


Registration:

Click here to view registration options for this program. 

Program Times:

Day One:
Monday, September 19 – 8 a.m. – 5:00 p.m.

Day Two:
Tuesday, September 20 – 8 a.m. – 12:30 p.m.


Program Location:  

The Boston University Center for Finance, Law & Policy
595 Commonwealth Avenue, 4th Floor, Boston MA 02215-1704