The current geopolitical conditions and high oil and gas commodity prices promise to lead to increased oil and gas development activity in the United States, much of which will be funded by secured reserve-based loans. This makes it an excellent time for banks (and exploration and production companies seeking financing) to review the Office of the Comptroller of the Currency’s Oil & Gas Exploration & Production Lending booklet from the Comptroller’s Handbook. Reviewing the Oil and Gas Booklet now can help lenders avoid heartache later when the current boom cycle inevitably turns to a bust.
A recurrent problem in bank deposit and collection and lending disputes is the appropriate role of “good faith” as an overarching principle in lender liability cases. Oftentimes, plaintiffs will look to the UCC as the statutory source for an independent duty of good faith, usually framed as the “implied duty of good faith and fair dealings” under tort law. This can lead to problems.
A recent decision from a Texas bankruptcy court involves a short-term financing arrangement that went “terribly wrong.” The issue is whether a venerable business enterprise was “dead on arrival” or just “walking wounded” and capable of reorganization. As determined by the bankruptcy court, the bridge lender acted in “bad faith” when it assumed control over the management of the business enterprise to protect its own interests, causing the business enterprise’s demise.
The January 2022 issue of this newsletter is a Special Report on the cessation of the publication of the benchmark interest rate known as the LIBOR (London Interbank Rate) scheduled for June 30, 2023. The Special Report discusses the challenges during the transition period facing U.S. financial market participants who are stakeholders in so-called “tough legacy” (difficult to amend) financial contracts” lacking satisfactory “fallback provisions.”
For the financial institution, a garnishment order is a red flag signaling customer financial insecurity. There are certain federal benefits received by consumers administered by four federal agencies protected under federal law from garnishment by creditors. A threshold question for financial institution receiving a garnishment order is whether a federal exemption applies.
A federal district court sitting in the Northern District of California recently upheld the Office of the Comptroller of the Currency’s interest rate exportation rule. The Attorneys General from three states challenged the rule in a lawsuit filed on July 29, 2020. The decision released in early February 2022 is the latest development in the controversy over whether national banks have the authority to export interest rates in light of the uncertainty created by the Second Circuit’s much-discussed Madden decision.
The COVID-19 pandemic seriously impaired the economic livelihood of large numbers of consumers beginning in 2020. Certain types of payments on consumer debt were suspended or reduced during the pandemic in 2020 and 2021. Some extensions carried over into 2022 but forbearance relief is ending. Many of the hardship programs were enacted through government initiatives. Individual creditors also offered COVID-related hardship programs, in some cases on a national level. The moratoriums and stays issued by state and local governments and the judiciary on creditor collection activity generally have expired or will expire in 2022.
The impending end of the use of LIBOR as benchmark interest rate for commercial contracts and securities is “a global phenomenon that has the financial industry mobilizing ahead of a looming deadline,” according to the financial services megabank J.P. Morgan. This Special Report reviews, form an historical perspective, the events leading to the demise of LIBOR as well as the major actions taken in response by the banking regulators and state lawmakers in the United States. This analysis serves as a lead in to discussing these two questions: What financial market participants tied to the U.S. Dollar LIBOR should expect in the coming months as the transition away from LIBOR proceeds? An even more prescient question is what financial market participants tied to the U.S. Dollar LIBOR should expect when LIBOR disappears? We offer insights and takeaways. Until Congress passes federal legislation preempting state law or 48 state legislatures join New York and Alabama in passing LIBOR transition laws, financial institutions and market stakeholders will be working their way through a patchwork of responses from Congress, the U.S. banking regulators and state legislators.
U.S. market stakeholders with exposure to LIBOR have no choice but to prepare for the end of LIBOR. USD LIBOR is slated to disappear as of the end of publication on June 30, 2023. To the extent there are clear takeaways to be drawn from the myriad of actions taken so far by U.K. and U.S. banking regulators and two state legislatures, here is our working list:
New York and Alabama are the first two states to pass legislation addressing LIBOR’s cessation with respect to the U.S. dollar. On March 5, 2021, LIBOR’s United Kingdom regulators officially announced the discontinuation of the U.S. Dollar LIBOR (USD LIBOR).
Financing statements need not be precise in providing an “indication of collateral.” UCC 9-504 states that “[a] financing statement sufficiently indicates the collateral that it covers if the financing statement provides...an indication that the financing statement covers all assets…” Given this language, one might expect every financing statement to indicate the collateral is “all assets,” period. But secured parties rarely do this, often deciding to include additional descriptive language. And this leads to problems.
Executing a document in person before a notary has become a challenging process in these pandemic times. An alternative is for the notary public to conduct the notarization process over the internet. Instead of appearing before the notary in person, the signer uses a webcam or other similar technology to appear online and electronically sign. The notary completes the notarization electronically. So long as the notary is properly credentialed and complies with the procedures mandated by applicable law, notarization performed digitally is legal.
In handling a secured transaction under Article 9 of the UCC, the secured lender must make sure that it uses the correct categories of collateral. Different categories often require different methods of perfection. For example, a security interest in a “deposit account” may only be perfected by “control,” while a “securities account” may be perfected by either control or filing a financing statement.
On the horizon are changes to the existing federal regulatory structure for overdraft services as part of a new major reform initiative by the federal bank regulators to facilitate reform by the banking industry of its dependency on overdraft fees for profits.
A majority of the nation’s states now mandate financial institutions and or persons tied to the financial institution to report suspected financial exploitation against seniors and other vulnerable customers to law enforcement and social service agencies.
For decades, Texas had nonuniform provisions in its implementation of Article 9 that were designed to protect the right of owners of oil and gas right to receive payment for extracted hydrocarbons. Time and again, however, Texas’s provisions let mineral interest owners down, failing to create enforceable liens when the first purchaser of oil and gas went bankrupt. This was generally good news for lenders, because it meant that, in most circumstances, they could rely on the usual, predictable rights and priorities established by the uniform provisions in Article 9—without fear of being trumped by an automatically-perfected superpriority security interest.
In the 1980s, oil and gas producing states began passing laws to try to ensure that the mineral rights owners received payments owed to them for extracted oil, gas, and other minerals. Initially, most states addressed the issue via non-uniform amendments to Article 9 or liens that were subordinate to perfected Article 9 security interests. Subsequent cases exposed shortcomings in this approach, particularly when a debtor was a resident of a different state than the state where the wells were located.
By way of a one paragraph Order, the Fifth Circuit recently stayed the CFPB’s ability to implement the payment provisions of its 2020 Final Rule on payday regulations, until 286 days after resolution of the appeal now pending before it.
A recent 2020 case from Iowa deals with similar facts and issues as a 2015 decision by an Illinois court. Both cases look at the intent of the debtor who financed electronic bowling apparatus which was installed inside their respective bowling alleys to determine whether the apparatus constitutes a fixture subject to mortgage financing or equipment subject to Article 9’s UCC financing rules for personal property. The more recent decision relies on the earlier decision.
Banks engaging third parties to perform services and activities are held responsible for the third-party’s performance just as if the bank were to perform the service or activity itself. Moreover, engaging a third party does not diminish the bank’s own responsibility to operate in a safe and sound manner including compliance with applicable law. At least on paper, these principles are integral to modern day federal bank regulation and compliance.