A recent battle between economically stretched lenders and defaulting borrowers which played out before a New York lower court provides a good case study of how the changing COVID-19 pandemic is influencing the exercise of UCC foreclosure remedies involving mezzanine financing.
A blockbuster lawsuit out of the Southern District of New York—involving a nearly $900 million wire-transfer mistake—has raised a host of questions about fairness, equity, and the “discharge for value” affirmative defense. The case, which is already subject to an expedited appeal in the Second Circuit, is certain to be a hot topic for some time to come and promises—one way or another—to have a lasting impact upon the wire transfer industry.
For years, payments giant PayPal wrangled unsuccessfully with the Consumer Financial Protection Bureau (Bureau or CFPB) over its decision to treat certain types of “digital wallets” capable of storing funds as “prepaid accounts” subject to the Bureau’s prepaid accounts rule. After the Bureau finalized its prepaid accounts rule, PayPal brought a lawsuit in the United States District Court for the District of Columbia challenging two key provisions of the final prepaid rulemaking.
For the second time since 2017, a federal appeals court has weighed in on whether special statutory lien provisions designed to help ensure that owners of oil and gas interests receive payment from the first purchasers of the hydrocarbons actually provide interest owners with the protection they hope for. This time, an appeal from an adversary proceeding related to the First River Energy, L.L.C. bankruptcy provided the Fifth Circuit Court of Appeals with the opportunity to consider the oil and gas lien provisions. As anticipated, the Fifth Circuit ruled that Oklahoma’s Oil and Gas Owners’ Lien Act of 2010 provided solid protection to interest owners in Oklahoma, while Texas’s non-standard UCC 9.343 once again failed to provide the automatic protection that Texas interest owners undoubtedly wish it did. The case is Deutsche Bank Trust Co. Ams. v. U.S. Energy Dev. Corp. (In re Fist River Energy, L.L.C.), ___ F.3d ___, 2021 U.S. App. LEXIS 3032.
The dispute between states and the federal government regarding how to determine which entity—a bank or its lending partner—is the “true lender” recently entered a new phase. Seven states (California, Colorado, Massachusetts, Minnesota, New Jersey, New York, and North Carolina) and the District of Columbia (the “States”) joined to sue the Office of the Comptroller of the Currency (“OCC”) in an effort to undo the OCC’s recently issued final rule on National Banks and Federal Savings Associations as Lenders (the “Rule”), which specifies when a bank is the “true lender” of a given loan.
Newly minted Supreme Court Justice Amy Coney Barrett authored a significant decision while serving as an appellate judge on the Seventh Circuit. The decision is directly relevant to the financial services industry and consumers. The holding of the case allowed federal standing requirements to close the gateway to federal jurisdiction in a class action lawsuit brought under a consumer protection statute.
Bankruptcy courts are probably the only courts in which motions related to stays involve interesting legal issues with any regularity. Case in point: A recent bankruptcy decision from the District of Montana considered—on a motion to modify stay—whether a “Wholesale Financing Agreement” (“WFA”) and a “Wholesale Finance Security Agreement” (“WFSA”) created a creditor-debtor relationship or an express trust. The decision, which holds that a secured financing rather than a trust was created, contains solid analysis of a number of frequently encountered Article 9 issues. The case is In re Hawaii Motorsports, LLC, 2020 Bankr. LEXIS 3428 (Bankr. D. Mont. Dec. 7, 2020).
In the waning days of the Trump Administration, the Consumer Financial Protection Bureau fulfilled its promise to address the holes left in its first set of rulemaking amending the federal debt collection rule known as Regulation F. The finalizing amendments are now complete, making it possible to gain some preliminary perspective on the 2020 revised regulation in its entirety.
The end of 2020 and start of 2021 have been marked by a new round of Paycheck Protection Program legislation and updated regulations, as well as a number of decisions from the courts concerning PPP issues—all of which hopefully provides additional clarity for a program in which clarity has often been sorely lacking.
Early in this millennium, the Sedona Conference earned a reputation for providing helpful, workable guidance for emerging and overlooked or underserved areas of the law, particularly e-discovery. Via a series of think-tank-style working groups focused on discrete legal issues, the Sedona Conference tries to create “practical solutions and recommendations” which are then “developed and enhanced through a substantive peer-review process” and ultimately “widely published in conjunction with educational programs for the bench and bar, so that it can swiftly drive the reasoned and just advancement of law and policy in the areas under study.” Many judicial decisions—especially from the district courts that must effectively, efficiently, and justly administer the law and civil rules—rely upon and even praise the principles developed by the Sedona Conference, whose mission “is to move the law forward in a reasoned and just way through the creation and publication of nonpartisan consensus commentaries and through advanced legal education for the bench and bar.”
The banking industry entered the coronavirus pandemic in a position of relative strength—far stronger than it was before the Great Recession. As a result, everyone from bank customers to the federal government has looked to banks to help them weather the COIVD-19 storm. In particular, the CARES Act and its Paycheck Protection Program (“PPP”) created a structure that used banks as conduits for quickly distributing hundreds of billions of dollars of loans to businesses in the hopes that those businesses could continue to pay employees, mortgages and leases, and utilities and thus remain in business.
A favorite guessing game before the Biden administration takes charge is prognostication. The fate of agency rulemaking promulgated by the Trump administration in the area of consumer protection is a hot topic. The Consumer Financial Protection Bureau (CFPB or Bureau) recently released the first of two final rules on debt collection practices (Final Rule). Under a new Bureau head chosen by the Biden team, there is a good chance the CFPB’s rulemaking on debt collection practices is going to be revisited.
After years of regulatory juggling, in July 2020 the Consumer Financial Protection Bureau (CFPB) released its so-called “Final Payday Lending Rule,” revoking the mandatory Underwriting Provisions of the 2017 Final Rule. The CFPB’s revocation of the Underwriting Provisions represents an enormous win for the small dollar lending industry. The latest iteration of the Final Rule leaves the Payment Provisions intact. Long overshadowed by the controversy over the Underwriting Provisions, the Payment Provisions are now the center of attention although the Underwriting Provisions may be resurrected when the new Biden Administration takes control of the CFPB.
Only in New York is the rule insulating a depositary bank from a direct conversion claim still good law. The rule is based on an old version of the UCC. A provision found in the Revised UCC, adopted by all the other states, completely overturns the old Code’s barrier. A recent ruling on a motion to dismiss by a New York federal district court illustrates the glaring anomaly.
Confusion continues to swirl around PPP loan forgiveness for lenders and borrowers. Lenders are holding back on processing loan forgiveness applications. Small businesses continue to be adversely affected by the pandemic. For small businesses, the need for economic assistance ostensibly coming from loan forgiveness is dire.
A story in the June 2020 issue of this newsletter analyzed the recent final rule regarding interest rate transfers promulgated by the Office of the Comptroller of the Currency (OCC) after Acting Comptroller Brian Brooks pressed the issue as one of his first policy initiatives. The "Permissible Interest on Loans that are Sold, Assigned or Otherwise Transferred" rule (Final Rule) confirms national banks and federal savings associations may rely on the long-standing "valid-when-made" principle, which allows purchasers of loans from financial institutions to continue to enforce the interest rate available to the bank or savings association, even if the rate would otherwise violate state usury laws.
For all the uniformity the UCC brings to the areas of law that it covers, it remains the case that the UCC frequently does not define key terms. As a result, state law steps in and fills the definitional gaps created by the UCC. For example, the U.S. Supreme Court has explained that
Filling out the collateral description box in a UCC financing statement is tedious work. Why not just incorporate the collateral description from the security agreement and record the financing statement with the UCC filing office? Sounds like an easy shortcut.
The Office of the Comptroller of the Currency (OCC) recently released a Notice of Proposed Rulemaking which creates a bright line test for discerning what entity is the "true lender" in a loan transfer transaction between a national bank and a third party. This is a significant regulatory development coming on the heels of new, final prudential rulemaking by the OCC and the Federal Deposit Insurance Corporation (FDIC) on interest rate transfers.
In general, irrevocable letters of credit are invincible under Article 5 of the Uniform Commercial Code. What happens when the conservator of a failed credit union repudiates a letter of credit, relying on its powers under the Federal Credit Union Act because the beneficiary did not draw on the letter of credit before the appointment of the conservator? The story of how the beneficiary of the letter of credit successfully battled the National Credit Union Administration Board is told by the U.S. Court of Appeals for the Eighth Circuit in a recent decision.