Following an era of relaxed standards for issuing loans, lenders must be aware of a bankruptcy court’s ability to subordinate liens for equitable reasons. On May 13, 2009, in In re Yellowstone Mountain Club, the Bankruptcy Court for the District of Montana issued an order subordinating the secured lender’s $232 million claim below the (i) debtor-in-possession financing; (ii) administrative fees; and (iii) the unsecured claims. Section 510(c) of the Bankruptcy Code authorizes a bankruptcy court to subordinate a claim for equitable purposes, but it provides little insight into the reasons that would justify this harsh remedy. For non-insider claimants like the senior lender in In re Yellowstone, subordinating a claim is a drastic measure that bankruptcy courts will rarely utilize. But the lender’s conduct, in issuing a $375 million syndicated loan with little financial due diligence and far in excess of the borrower’s ability to repay, “shocked the conscience of the Court.”

The lender issued a $375 million loan to the Yellowstone Club, a high end development company controlled by Timothy Blixseth through Blixseth Group, Inc., the majority shareholder. The lender marketed its product as the equivalent of a home-equity loan, and Blixseth treated it that way, taking large distributions from Yellowstone that he never repaid. Although Yellowstone was unable to repay its debt, the lender benefited because it had obtained a $7.5 million fee for closing the loan and had unloaded portions of the loan to the other syndicates. The bankruptcy court, finding the practices tantamount to predatory lending, determined that equity dictated subordinating the loan.

 

Lenders should be mindful of a court’s power to subordinate claims, even if it is rarely used. Although the bankruptcy court withdrew this opinion because the parties had reached a settlement on the issue, this case is still instructive for creditors. It illustrates that bankruptcy courts can use their own discretion to determine whether a lender has indulged in unsavory lending practices, a troubling thought to secured creditors everywhere. Nonetheless, equitable subordination for non-insiders is rare (it almost never happens), and lenders that employ responsible lending practices are unlikely to ever encounter this problem. 

When representing a tenant, I always want an SNDA so that if the landlord defaults on its mortgage my client is assured that it can remain in the space as long as there are no tenant defaults. 

When representing a landlord, it is becoming increasingly more difficult to get lenders to make any change to their form subordination non-disturbance agreements ("SNDA").  Lenders are insisting that  tenants give up termination rights, offset rights, right to casualty proceeds and other valuable rights contained in the lease that the landlord was willing to give and which may even be customary provisions in a retail lease in today’s market.

Recently, I encountered the situation  where the lease contained a standard termination clause if a co-tenancy failure could not be cured within a set period of time. The landlord’s lender would not agree that the tenant still had that right after a foreclosure.

So, is a tenant better off without an SNDA? If you weigh the probabilities, a tenant may be better of without one. If a lender forecloses, chances are the center is not performing well. If the lender forecloses and terminates the lease because there is no SNDA, how hurt is the tenant? Maybe the tenant would prefer termination. In the co-tenancy situation, the tenant gets the very remedy it was trying to preserve.  Without an SNDA the lender either has to terminate the Lease or accept every provision in it.  In this situation, the Tenant may be better off without the SNDA.

Granted if the tenant is performing well and does not wish to leave, there is some risk. But even in this situation, the only time a lender will terminate the lease is if the landlord wishes to redevelop the center.  A redevelopment, which will cost substantial sums, is highly unlikely in a healthy center. It is more likely that the lender will be doing everything it can to keep a well performing tenant.  Just something to consider – a tenant may very well be better off without an SNDA.

In December 2007, a Lake County Common Pleas Court judge issued a landmark decision holding, among other things, that an owner of real estate that touches Lake Erie owns title extending as far as the water’s edge. State ex rel. Merrill v. Ohio Dept. of Natural Resources (2007), Lake County Common Pleas Case No. 04CV001080. Lake County is one of eight Ohio counties which contain Lake Erie shoreline.

On August 21, 2009, the Court of Appeals for the Eleventh Appellate District affirmed that holding in State ex rel. Merrill v. Ohio Dept. of Natural Resources, 2009-Ohio-4256. In particular, the Court of Appeals determined “that the waters and submerged bed of Lake Erie when under such waters is controlled by the state and held in public trust, while the littoral owner takes fee only to the water’s edge.” 2009-Ohio-4256 at ¶129. The Court of Appeals reasoned that “[t]he water’s edge provides a readily discernible boundary for both the public and littoral landowners.” 2009-Ohio-4256 at ¶128. The actual water’s edge, or shoreline, is the line of contact of a body of water and the land between the high and low water marks. 2009-Ohio-4256 at ¶¶97 and 127. 

 

In reaching its decision, the Court of Appeals reviewed appeals by environmental organizations representing members who make recreational use of the shores of Lake Erie, and cross-appeals by individual landowners and a non-profit corporation representing owners of littoral property on Lake Erie. In an interesting twist, the Court of Appeals found that the attorney general lacked the authority to pursue an appeal on his own behalf and ordered the state of Ohio’s assignments of error and briefs stricken.

 

The Court of Appeals did vacate that part of the trial court’s decision whereby the trial court attempted to reform any deed granting to its owner land extending lakeward of the water’s edge. The Court of Appeals found the issue of reforming the deeds was not before the trial court and, therefore, the parties had not been afforded the opportunity to argue their positions. 2009-Ohio-4256 at ¶103.

 

Any party wishing to appeal the decision must file a notice of appeal to the Supreme Court within 45 days from the entry of the Court of Appeal’s judgment.

 Thank you to Realtor Magazine: Online   for the wonderful article written by Mariwyn Evans about the new and unique challenges the real estate industry is addressing during the current economic times.  I was fortunate enough to be interviewed by Mariwyn for the article which you can read by following this link.  The article touches on landlord/tenant issues, lender/borrower issues and partnership/development entity issues as well as real estate litigation issues.  

 

A perpetual letter of credit (LOC) does not last as long as you might think.  In physics “perpetual motion” is movement that goes on forever.  Commercial law is less ambitious.  Under U.C.C. § 5-106(d), a “perpetual” LOC expires after five years.  To further complicate the issue, a recent case from the 9th Circuit held that a LOC that continues indefinitely is not “perpetual.”

 

According to Golden West Refining Co. v. SunTrust Bank, 538 F.3d 1233 (9th Cir. 2008), a letter of credit is only "perpetual" if that word is used explicitly.  Under U.C.C. § 5-106(d), "[a] letter of credit that states that it is perpetual expires five years after its stated date of issuance, or if none is stated, after the date on which it is issued."  In Golden West the bank argued that its LOC was "perpetual" and had expired 5 years after it had been issued.  Its LOC terminated after 1 year, but "automatically renewed" if the lender did not elect to terminate it. The 9th Circuit rejected the bank’s argument.  It found that "a letter of credit is only perpetual if it expresses in words that it is perpetual."  Because the LOC in question terminated after a year and did not explicitly state that it was perpetual, it was not "perpetual" under U.C.C. § 5-106(d) and did not terminate after 5 years.

 

Golden West has not been cited by any court outside the 9th Circuit yet.  Although not binding on states outside the 9th Circuit, its holding is instructive for anyone drafting a LOC, at least until there is further law interpreting perpetual LOCs.  Accordingly, if you want a LOC to last indefinitely, state that it “renews automatically.”  But if you want it to be “perpetual” and expire after 5 years, use the word “perpetual.”

So you finally got a buyer for your house after having it on the market for nine months. As frosting on the cake the buyer says she can close within a week. 

Great! Right? Well, if your buyer made her mortgage loan application on or after July 30, 2009, it may take a little longer.

 

On July 30, Federal Reserve System rules (http://edocket.access.gpo.gov/2009/E9-11567.htm) went into effect implementing the Mortgage Disclosure Improvement Act of 2008 (MDIA). The rules – -applicable to purchase, construction and refinance situations – – impose various waiting periods between the time a transaction specific disclosure is made by the lender and the time when the residential loan transaction can close. The rules apply to all institutions engaged in closed-end, dwelling-secured lending for consumer purposes that is subject to RESPA.

 

The rule was going to go into effect in October 2009, but the date was moved up by the Fed two months in mid-May. Home equity lines of credit are excepted from the rule and are instead subject to separate rules for “open-end” credits. Different rules also apply for timeshare interests. 

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The U.S. Court of Appeals for the District of Columbia recently upheld a 2007 Federal Communications Commission ("FCC") order prohibiting the owner’s of apartment buildings, condominiums and other multi-unit residential properties from entering into exclusive contracts for providing cable T.V. services.  The FCC relied upon Section 628(b) of the Communications Act.  The FCC’s position is that to restrict a multi-unit residential project’s access to only one cable provider forecloses the expansion of fiber and phone, video and internet bundling services; thereby, denying residences the benefits of increased competition, lower prices and improved content and services. Take note of this ruling when the issue arises in the multi-unit residential projects you own, manage or are developing.

Where there’s trouble, there’s trouble. As a growing number of homeowners have defaulted or neared default on their mortgages, numerous schemes have cropped up taking advantage of their willingness to do whatever it takes to save their homes. 

 

The Court in State v. Cicerchi, 2009 Ohio 2249 (Ohio Ct. App. 2009) took the time to explain one of the more common plots:

 

One all-too common scam occurs when an individual or company identifies an at risk homeowner and misleads the homeowner into a "temporary" transfer of the deed to a third party with good credit. The third party then purchases the property and "leases" it back to the homeowner. The scammer convinces the homeowners that they can "refinance" their home using the third party’s good credit. The homeowners are led to believe that they will pay "rent" on the home and once their credit is rehabilitated, they will get the title to their house back.  The homeowners then lose title to their homes, while the perpetrator profits by remortgaging the property or pocketing fees paid by the homeowner. Rarely do the homeowners ever regain title or receive any benefit from the sale, and often lose any equity that may have been in their home.

 

In Cicerchi, the defendant perpetrated a similar fraud and was convicted of misdemeanor theft, securing writings by deception, and telecommunications fraud. On appeal, the Court overturned the securing writings by deception conviction due to insufficient evidence. 

 

Earlier this year, the U.S. Department of the Treasury announced a partnership with several state and federal agencies to combat these mortgage-rescue frauds. The focus of the partnership is to identify offending companies and disseminate information to potential victims. The Federal Trade Commission and Office of the Comptroller of the Currency have each published a helpful bulletin on the variety of scams that can occur. 

 

The obvious victims are homeowners in a situation where they require assistance to perform under their loan or otherwise come to an amenable resolution with a lender. But fraudulent foreclose rescue companies are also an impediment to banks because they commonly tell borrowers not to contact their lender or not to enter workout discussions. Banks are left in the dark until it’s likely too late. Further, the “fees” borrowers pay to participate in the scam could otherwise be paid to the lender for amounts due on the loan. Mortgage lenders would be well advised to contact distressed borrowers as soon as possible to notify them of potential scams and initiate workout negotiations. 

 

Courtesy of DailyHaHa.com http://www.dailyhaha.com/_pics/notice_the_notice.htmA helpful reminder to lenders – if you’re going to foreclose, read the note and mortgage and do what they say. In a recent Ohio Court of Appeals case, the bank failed to follow these instructions and was rewarded by having its foreclosure complaint dismissed. 

The borrower missed a payment on her mortgage and the bank sent a default notice via certified mail. When the past due amount was left unpaid, the bank foreclosed. Seems like a run-of-the-mill foreclosure case, right? Not quite, because the subject Note contained the following language: “Any notice that must be given to me under this Note will be given by delivering it or by mailing it by first class mail to me at the Property Address.” The borrower denied that she received the notice and, in fact, the certified mail envelope was returned to the bank as “unclaimed.”

 

Based on the express language of the Note (the Mortgage contained similar language), the Court rejected the bank’s arguments that it satisfied the notice requirements. The Note gave two options – delivery or mailing first class. There was no evidence the notice was actually delivered, and any presumption of delivery never arose because there was evidence, i.e. the returned envelope, that the notice was not delivered. The bank never mailed the notice by first class mail. The fundamental step of choosing the best mail service method could have saved the complaint. 

 

This example continues a trend toward more rigorous review of lenders’ methods in foreclosure cases. From requiring proof of note ownership, to mandating alternative dispute resolution and dismissing cases under a res judicata analysis, courts have become a more borrower-friendly environment as the foreclosure crisis has progressed. As judges cast an increasingly skeptical eye upon each foreclosure action that appears on the docket, it is critical that lenders pay attention to the smallest, seemingly insignificant details of the process. 

Congress has recently introduced a number of measures in response to the problems caused by defective drywall imported from China. Both the House and Senate introduced identical bills titled the Drywall Safety Act of 2009 (H.R. 1977; S. 739), which, if enacted, would require the U.S. Consumer Product Safety Counsel to study at least ten samples of drywall imported from China between 2004 and 2007 taken from homes in Florida, Louisiana, Mississippi, Texas and Virginia. The study is to include an analysis of (1) the chemical and organic composition of the drywall, (2) the effect of the drywall compounds on metal wiring, air conditioning and heating units, and other metal fixtures, and (3) any health or environmental impact of the compounds. The Act further directs the CPSC to initiate a proceeding to determine whether a consumer product safety standard regulating the composition of materials used in drywall is necessary to protect the health and safety of residential homeowners and imposes a temporary ban on the importation of drywall exceeding five percent organic compounds.

Additionally, the House passed a measure to amend the Mortgage Reform and Anti-Predatory Lending Act, H.R. 1728, to direct the Secretary of Housing and Urban Development to study the effect on residential mortgage foreclosures of (1) the presence of defective Chinese drywall in such residences and (2) the availability of property insurance for residences where such drywall is present.  HUD is required to report its findings, conclusions and recommendations to Congress. This bill has been referred to committee.

 

The focus of the legislation under consideration is the evaluation of the drywall problem and its impact upon residential owners, and addressing future drywall imports, as opposed to providing any relief to those whose homes contain the defective Chinese drywall. If the proposed studies show that Chinese drywall issues have caused environmental, health, foreclosure or insurance issues for residential property owners, there may be another round of legislation to address those issues. Check back here for updates as we track the progress of these measures through Congress.