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Financial Services FLASHPOINTS May 2019

May 15, 2019Print This Post Print This Post

Michael L. Weissman, Levin Ginsburg, Chicago
312-368-0100 | E-mail Michael L. Weissman

This month we consider whether an unsecured claimant in a bankruptcy case may recover postpetition attorneys’ fees if its prepetition contract calls for them, whether a Uniform Commercial Code (UCC) financing statement lacking a collateral description but available from other sources can perfect the filer’s UCC lien, and whether an indemnification claim is substantively identical to a breach-of-contract claim if it is not based on payment made to a third party.

Unsecured Claimant in Bankruptcy Case Can Claim Postpetition Attorneys Fees

In SummitBridge National Investments III, LLC v. Faison, 915 F.3d 288, 289 (4th Cir. 2019), the court ruled that an unsecured claimant in a bankruptcy case could assert, as part of its claim, attorneys’ fees it paid for postpetition legal services if the promissory notes signed prepetition allowed recovery of “all costs of collection, including but not limited to reasonable attorneys’ fees.”

Between 2003 and 2012, Branch Banking and Trust Company (BB&T) made loans totaling $2.1 million to Ollie William Faison. The loans were secured by mortgages on North Carolina farm properties. The promissory notes contained the language quoted above concerning attorneys’ fees.

Faison filed a Chapter 11 petition for relief on January 3, 2014. BB&T filed three proofs of claim. In January 2015, BB&T assigned the notes to SummitBridge.

When a Chapter 11 plan was proposed, SummitBridge’s claims were aggregated and stated to be $1.715 million, the value of the farm properties securing the notes. The $1.715 million covered all of the principal and prepetition interest and some, but not all, of the postpetition fees incurred. The plan permitted SummitBridge to file a proof of claim to recover the postpetition fees not covered by the collateral security.

Faison objected: “The Bankruptcy Code does not provide for allowance of an unsecured claim for post-petition attorneys’ fees.” 915 F.3d at 290.

Citing the U.S. Supreme Court’s decision in Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443, 167 L.Ed.2d 178, 127 S.Ct. 1199 (2007), the court said that unless expressly disallowed under the Bankruptcy Code, all claims enforceable under applicable state law are deemed enforceable in bankruptcy. Further, there is nothing in the Bankruptcy Code, 11 U.S.C. §101, et seq., disallowing claims for postpetition attorneys’ fees incurred in connection with federal bankruptcy law issues. The Second and Ninth Circuit Courts of Appeal had previously approved this approach.

Faison attempted to convince the court that SummitBridge was barred from asserting its claims for postpetition fees by §§502(b) and 506(b) of the Bankruptcy Code. But the court disagreed.

With respect to §502(b), Faison argued that because the fees in question were incurred after the Chapter 11 case was filed, SummitBridge could not have a claim for them on “the date of the filing of the petition.” 915 F.3d at 292. The court responded that the term “claim” as broadly defined in the Code includes “right[s] to payment[s]” that are “contingent,” and further, “[w]hat matters is that the right to those fees arose pre-petition, when Faison signed the promissory notes.” Id.

Faison’s assertions under §506(b) were rejected as follows: “Section 506(b) has nothing to do with the allowance or disallowance of claims.” 915 F.3d at 294.

What’s the point? The Fourth Circuit has joined other federal courts of appeal in allowing unsecured creditors to file claims that include attorneys’ fees stipulated in prepetition notes incurred in postpetition proceedings.

Document Not Attached To UCC1 Financing Cannot Suffice for Collateral Description but Can Be Cured by Subsequent Amendment

The two principal errors most commonly made in UCC perfection compliance (by my observation) are (1) not getting the debtor’s name right and (2) failing to include a proper collateral description. The latter was the issue in In re Financial Oversight & Management Board for Puerto Rico, 914 F.3d 694 (1st Cir. 2019).

In 2008, the Employees Retirement System of the Government of the Commonwealth of Puerto Rico was authorized to incur debt. The board of trustees adopted a resolution allowing the issuance of $2.9 billion in bonds. The resolution was publicly available on various governmental websites.

The System resolution defined the property securing the bonds as follows:

1. All Revenues.

2. All right, title and interest of the System in and to Revenues, and all rights to receive the same.

3. The Funds, Accounts, and Subaccounts held by the Fiscal Agent, and moneys and securities and, in the case of the Debt Service Reserve Account, Reserve Account Cash Equivalents, from time to time held by the Fiscal Agent under the terms of this Resolution, subject to the application thereof as provided in this Resolution . . .

4. Any and all other rights and personal property of every kind and nature from time to time hereafter pledged and assigned by the System to the Fiscal Agent as and for additional security for the Bonds and Parity Obligations.

5. Any and all cash and non-cash proceeds, products, offspring, rents and profits from any of the Pledged Property mentioned described in paragraphs (1) through (4) above, including, without limitation, those from the sale, exchange, transfer, collection, loss, damage, disposition, substitution or replacement of any of the foregoing. 914 F.3d at 704 n.3.

The System executed a security agreement granting the bondholders a security interest in the System’s “Pledged Property.”

Notwithstanding the definition of the collateral in the resolution, the security agreement did not define the collateral. All that it said about the “Pledged Property” was that “[a]ll capitalized words not defined herein shall have the meaning ascribed to them in the Resolution.” 914 F.3d at 704. The resolution was not attached to the security agreement, and it did not state where the resolution could be found.

The version of the UCC in effect in Puerto Rico in 2008 called for the filing of a financing statement in order to perfect a security interest. The financing statement had to “contain[ ] a statement indicating the types, or describing the items, of collateral.” 914 F.3d at 705.

In June and July 2008, financing statements were filed. In the statements, the collateral was described as “[t]he pledged property described in the Security Agreement attached as Exhibit A hereto and by reference made a part thereof.” Id. The attached security agreement was a document that purported to define the “Pledged Property” by reference to the resolution, but no copy of the resolution was included. Simply put, there was no description of collateral.

In 2012, Puerto Rico amended Article 9 of its UCC, but nothing was done about the 2008 filings.

In December 2015 and January 2016, however, four financing statement amendments were filed. The amendments described the collateral as “[t]he Pledged Property and all proceeds thereof and all after-acquired property as described more fully in Exhibit A attached hereto and incorporated by reference.” Id. This time Exhibit A contained a full itemization of “Pledged Property” as it appeared in the resolution.

The first issue before the First Circuit was whether the 2008 filings had resulted in a perfected security interest. The conclusion was obvious. The court said: “[T]he UCC financing statements filed in 2008 (the ‘2008 Financing Statements’) did not perfect the Bondholders’ security interest, as they lacked a sufficient description of collateral.” 914 F.3d at 703. On the other hand, the court concluded, “we find that the financing statement amendments filed in 2015 and 2016 (together, the ‘Financing Statement Amendments’) satisfied the filing requirements for perfection when read in conjunction with the 2008 Financing Statements.” 914 F.3d at 703.

The second issue asked the First Circuit to dance on the head of a pin. The question was the sufficiency of the debtor’s name on the financing statements. The name of the issuer of the bonds used in the 2008 Financing Statements was “Retirement System for Employees of the Government of the Commonwealth of Puerto Rico,” whereas the 2015 and 2016 financing statement amendments used the official name “Employees Retirement System of the Government of the Commonwealth of Puerto Rico.”

Sweeping away any doubts, the court simply concluded, “Because the Financing Statement Amendments used ‘Employees Retirement System of the Government of the Commonwealth of Puerto Rico,’ they contained an appropriate name of the debtor under the Commonwealth’s Article 9.” 914 F.3d at 719.

What’s the point? Absence of a ready source to determine the collateral affected by a UCC filing is fatal to its viability. And minor, easily identifiable errors, in the name of a debtor that is a widely known public body, will not affect its viability.

Court Clarifies Difference Between Breach-of-Contract Claim and Indemnification Claim

The United States Court of Appeals for the Second Circuit distinguished a breach-of-contract claim from an indemnification claim in Lehman XS Trust, Series 2006-GP2 v. GreenPoint Mortgage Funding, Inc., 916 F.3d 116 (2d Cir. 2019). (Yes, more than a decade after the Lehman Bros. collapse in the Great Recession, courts are still dealing with its aftermath.)

The instant case arose out of the 2006 sale of pools of residential home mortgages by GreenPoint to Lehman Brothers Holding, Inc., and Lehman Brothers Bank, FSB. Six years after the sale, a review determined that almost all of the loans were sold in violation of the representations and warranties GreenPoint made to Lehman. GreenPoint defended on the grounds that the claims against it brought by U.S. Bank as trustee were barred by the statute of limitations.

The purchase dates for the pools of mortgage loans were May 15, 2006, June 15, 2006, and July 17, 2006. Closing dates were May 31, 2006, June 30, 2006, and July 31, 2006.

GreenPoint’s representations and warranties included

  1. that the mortgage loans had been underwritten in accordance with its Underwriting Guidelines;

  2. that the mortgage loan schedules were complete, true and accurate;

  3. that the mortgage files were complete; and

  4. that, with some exceptions, the loan-to-value ratios did not exceed 80 percent. 916 F.3d at 121.

If GreenPoint were in breach, it had a period to cure. Upon a failure to cure, GreenPoint had a repurchase obligation. Furthermore, the documents evidencing the sale by GreenPoint to Lehman contained the following indemnification clause:

[GreenPoint] agrees to indemnify [Lehman] and hold it harmless from and against any and all claims, losses, damages, penalties, fines, forfeitures, legal fees and related costs, judgments, and any other costs, fees and expenses that [Lehman] may sustain in any way related to (i) any act or omission on the part of [GreenPoint] or any other person or entity in the origination, receiving, processing, funding or servicing any Mortgage Loan prior to the related Transfer Date or otherwise arising from the transfer of servicing of the Mortgage Loans provided for in this Agreement, [and] (ii) any assertion based on, grounded upon [or] resulting from a Breach of any of [GreenPoint’s R & Ws] contained herein. . . . [GreenPoint] shall immediately notify [Lehman] if a claim is made by a third party with respect to this Agreement or the Mortgage Loans. Id.

GreenPoint did not repurchase the offending loans, and lawsuits were filed against it one day prior to the sixth anniversary of each of the closing dates. The basis of each lawsuit was breach of contract and, alternatively, for indemnification for losses sustained.

The trial court dismissed the breach-of-contract claims because they were filed beyond the applicable New York statute of limitations and held that the indemnification claim was not really for indemnification but was, in fact, for breach of contract and, therefore, also barred by the statute of limitations.

The appeals court, applying New York law, ruled that the causes of action for breach of contract arose when the representations and warranties became effective, not when the demands for cure or repurchase were made, thus making the lawsuits untimely.

As to the claims for indemnification, the court said that under New York law a claim for indemnification does not arise unless liability is incurred by the indemnitee by a payment to a third party. In that case, the indemnification claims under review were timely. But that was not the case. No payments had been made to third parties. Therefore, the claims for indemnification, wherein recovery was sought for GreenPoint’s violations of the representations and warranties GreenPoint made to U.S. Bank, were, in the view of the court, claims for “breach of contract . . . plain and simple” because “U.S. Bank does not allege that to date it has paid on claims to third parties directly tied to GreenPoint’s breaches of its R & Ws.” 916 F.3d at 126 – 127.

What’s the point? This case reinforces the date upon which a claim for violation of the representations and warranties in a purchase and sale agreement arise and that an indemnity claim has to be predicated on a payment by the indemnitee to a third party precipitated by a misstatement by the indemnitor.

For more information about financial services, see COMMERCIAL AND INDUSTRIAL LOAN DOCUMENTATION — 2018 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.


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